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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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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, 2006
|- |  | --------------------------------------------------------------------------------------------------------------------------------



OR



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



001-14223

Commission File Number



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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



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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, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2) Large accelerated filer  x    Accelerated filer ̈Non-accelerated filer ̈



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 $1.61 billion at December 31, 2006 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, 2007 the number of shares outstanding of the
Registrants Class A Common Stock was 105,499,726 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 2007 Annual Meeting of Stockholders to be filed hereafter (incorporated, in part, into Part III
hereof).



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



FORM 10-K ANNUAL REPORT



For the Year Ended December 31, 2006



TABLE OF CONTENTS



|               |  |                                                                                                              |  |     
|-------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|               |  |                                                                                                              |  | Page
|PART I         |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 1.        |  | Business                                                                                                     |  | 4   
|Item 1A.       |  | Risk Factors                                                                                                 |  | 14  
|Item 1B.       |  | Unresolved Staff Comments                                                                                    |  | 21  
|Item 2.        |  | Properties                                                                                                   |  | 21  
|Item 3.        |  | Legal Proceedings                                                                                            |  | 21  
|Item 4.        |  | Submission of Matters to a Vote of Security Holders                                                          |  | 24  
|               |  |                                                                                                             
|PART II        |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 5.        |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 25  
|Item 6.        |  | Selected Financial Data                                                                                      |  | 26  
|Item 7.        |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 28  
|Item 7A.       |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 44  
|Item 8.        |  | Financial Statements and Supplementary Data                                                                  |  | 48  
|Item 9.        |  | Changes in and Disagreements With Auditors on Accounting and Financial Disclosures                           |  | 76  
|Item 9A.       |  | Controls and Procedures                                                                                      |  | 76  
|Item 9B.       |  | Other Information                                                                                            |  | 76  
|               |  |                                                                                                             
|PART III       |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 10.       |  | Directors and Executive Officers of the Registrant                                                           |  | 76  
|Item 11.       |  | Executive Compensation                                                                                       |  | 76  
|Item 12.       |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 76  
|Item 13.       |  | Certain Relationships and Related Transactions                                                               |  | 76  
|Item 14.       |  | Principal Accounting Fees and Services                                                                       |  | 76  
|               |  |                                                                                                             
|PART IV        |  |                                                                                                              |  |     
|               |  |                                                                                                             
|Item 15.       |  | Exhibits and Financial Statement Schedules                                                                   |  | 77  
|Signatures     |  | 81                                                                                                          
|Certifications |  |                                                                                                             
|Exhibit Index  |  |                                                                                                             



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##### 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 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 the costs, integration, performance and operation of businesses recently acquired, or that may be acquired in the future, by the Company, and the risks and uncertainties associated with the recent change in
management at Deephaven Capital Management LLC (together with its subsidiaries, Deephaven) and the potential impact on the Deephaven business and assets under management. 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 from time to time with the SEC. This discussion should be read in conjunction with the
Companys Consolidated Financial Statements and the Notes thereto contained in this report.



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##### Table of Contents

PART I



Item 1.Business



Overview



Knight Capital Group, Inc., a Delaware corporation, and its subsidiaries (collectively Knight or the Company) is a leading
financial services firm that provides voice and electronic 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. Our Global Markets
business offers superior execution quality through natural liquidity, capital facilitation and trading technology, with comprehensive products and services that support the capital formation process. Our Asset Management business, Deephaven Capital
Management, is a global multi-strategy alternative investment manager focused on delivering attractive risk-adjusted returns with low correlation to the broader markets.



Knight Capital Group, Inc. 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 2006, 2005 and 2004, respectively, is set forth in Managements Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7 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 Our FirmInvestor Center
section of our corporate web site 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 statements as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. Also posted on our corporate web
site 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 web site 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 web site. None of the information on our corporate web
site 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.

Corporate Communications and Investor Relations

545 Washington Boulevard

Jersey City, NJ 07310

(201) 222-9400



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



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##### Table of Contents

Business Segments



The Company has two operating business segments, Asset Management and Global Markets, as well as a Corporate segment.



| |  |  | Asset ManagementOur Asset Management business, Deephaven, is a global, multi-strategy alternative investment manager focused on delivering attractive
risk-adjusted returns with low correlation to the broader markets for institutions and private clients. Assets under management were $4.2 billion as of December 31, 2006, up from $2.9 billion as of December 31, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Global MarketsOur Global Markets business offers superior execution quality through natural liquidity, capital facilitation and trading technology,
with comprehensive products and services that support the capital formation process. We make a market or trade in nearly every U.S. equity security and provide trade execution services in a large number of international securities, futures, options,
foreign currencies and fixed income instruments.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys Corporate segment includes all corporate overhead expenses and investment income earned on strategic investments and our corporate investment in funds managed by the Asset Management segment. 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.



In
the fourth quarter of 2004, the Company completed the sale of one of its business segments, Derivative Markets, to Citigroup Financial Products Inc. (Citigroup). In accordance with generally accepted accounting principles
(GAAP), the results of this segment have been included within discontinued operations for 2005 and 2004. For a further discussion of the sale of the Companys Derivative Markets business, see Footnote 9 Discontinued
Operations included in Part II, Item 8 Financial Statements and Supplementary Data of this document.



The following table sets forth: (i) revenues, (ii) expenses, excluding Regulatory charges and related matters and Writedown of assets and lease
loss accrual (Operating Expenses) and (iii) income (loss) from continuing operations before Regulatory charges and related matters and Writedown of assets and lease loss accrual and income taxes (Pre-Tax Operating
Earnings) of our segments and on a consolidated basis (in millions):



|                           |  |                                  |       |      |   |       |  |   |       |  
|-------------------------- |  | -------------------------------- | ----- | ---- | - | ----- |  | - | ----- | -
|                           |  | For the years ended December 31, |      
|                           |  | 2006                             |       | 2005 |   | 2004  | 
|Asset Management           |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  | $                                | 214.9 |      | $ | 89.8  |  | $ | 78.2  |  
|Operating Expenses         |  |                                  | 140.0 |      |   | 63.2  |  |   | 48.6  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                  | 74.8  |      |   | 26.5  |  |   | 29.6  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Global Markets             |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  |                                  | 669.7 |      |   | 470.7 |  |   | 531.0 |  
|Operating Expenses         |  |                                  | 510.9 |      |   | 425.6 |  |   | 461.1 |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                  | 158.8 |      |   | 45.1  |  |   | 69.9  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Corporate                  |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  |                                  | 66.6  |      |   | 74.2  |  |   | 16.6  |  
|Operating Expenses         |  |                                  | 35.3  |      |   | 24.9  |  |   | 33.5  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                  | 31.4  |      |   | 49.3  |  |   | (16.9 | )
|                           |  |                                  |       |      |   |       |  |   |       |  
|Consolidated               |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  |                                  | 951.2 |      |   | 634.6 |  |   | 625.8 |  
|Operating Expenses         |  |                                  | 686.2 |      |   | 513.7 |  |   | 543.2 |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  | $                                | 265.0 |      | $ | 120.9 |  | $ | 82.6  |  
|                           |  |                                  |       |      |   |       |  |   |       |  

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Totals may not add due to rounding



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A reconciliation of the income (loss) from continuing operations before income taxes, in accordance with
GAAP, (Pre-Tax GAAP Income) to Pre-Tax Operating Earnings and of total GAAP expenses to Operating Expenses is included in Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations.



Asset Management Segment



Business Segment Overview



We operate an Asset Management business through our Deephaven subsidiary.
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. A distinguishing feature of hedge funds is their use of long or short positions to seek to
offset market risks and isolate arbitrage opportunities. Deephaven is based in Minnetonka, M.N., and also has offices in London and Hong Kong.



Below is a summary of our assets under management at December 31, 2006, 2005 and 2004, and the blended fund returns for each of the years then ended:



|                                            |  |      |      |   |      |   |     |      |  |   |     |  
|------------------------------------------- |  | ---- | ---- | - | ---- | - | --- | ---- |  | - | --- | -
|                                            |  | 2006 |      |   | 2005 |   |     | 2004 | 
|Year-end assets under management (billions) |  | $    | 4.2  |   |      | $ | 2.9 |      |  | $ | 3.6 |  
|Annual fund return to investors*            |  |      | 22.8 | % |      |   | 7.2 | %    |  |   | 6.5 | %

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



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



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 2005 and 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. Pursuant to the terms of a simultaneously executed option agreement between the Company and these senior Deephaven managers, in the event of a change of control of the Company during
the initial three-year employment term, the Deephaven senior managers had the option to obtain a 51% interest in Deephaven in exchange for the termination of their employment contracts and associated profit-sharing bonuses. As the Company did not
experience a change of control during the term of these employment contracts, this option expired.



In December 2006, the Company entered into new long-term employment agreements with three senior managers of Deephaven (the Deephaven
Managers), two of whom were parties to the 2003 agreements. The new agreements, which became effective on January 1, 2007, are for three-year terms and include a right of renewal by the Deephaven Managers through 2012 under certain
circumstances. The new employment agreements provide profit-sharing bonuses based on the financial performance of Deephaven. According to the terms of the contracts, the Deephaven Managers will receive 50% of the first $60 million, and 75%
thereafter, of pre-tax earnings prior to the profit-sharing bonuses. 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 (or a new limited liability company to which the
Companys interests in Deephaven



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would be contributed) in exchange for the termination of their new employment agreements and associated profit-sharing bonuses. The agreement also provides
that in the event of a change of control of the Company following January 1, 2007 and prior to December 31, 2012, the Deephaven Managers would have the option (the Change of Control Option), in exchange for the termination of
their new employment contracts and associated profit-sharing bonuses, to obtain a 51% interest in Deephaven or, if the Option has 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 will be allocated between Knight and the Deephaven Managers in the same manner as under the new employment
agreements. During the life of the Option, the agreements provide that the Company may not sell Deephaven without the approval of the Deephaven Managers.



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 among others. We differentiate ourselves based on our reputation, client relationships, experience of the management team, investment strategies, risk profile and historical fund returns. Included within Deephavens $4.2
billion of assets under management as of December 31, 2006 is a corporate investment of approximately $188 million held by the Company and approximately $38 million of investments held by employee deferred compensation plans and certain
officers, directors and employees of the Company. As of December 31, 2006, no investor accounted for more than 10% of the Deephaven Funds assets under management.



As of December 31, 2006, approximately 38% of the Deephaven Funds assets under management were in the Deephaven
Market Neutral Funds (Market Neutral Fund). The investment philosophy for the Market Neutral 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 Market Neutral 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. Its returns are primarily
dependent upon equity trading volumes, equity volatility, mergers and acquisitions and secondary offering activity in the capital markets, and credit spread relationships, among other factors. Within the Market Neutral Fund, Deephaven generally
employs a variety of investment strategies, including event-driven, volatility-driven, fundamental equity, credit-driven and global macro strategies, among others. There is no material limitation on the types of investment strategies that may be
employed by the Market Neutral Fund.



In the second quarter of
2004, Deephaven launched a new single-strategy fund, the Deephaven Event Fund (Event Fund). The investment strategy of the Event Fund is event arbitrage, which involves investing in securities of issuers subject to event-driven
situations, such as, mergers, acquisitions, corporate restructurings, spin-offs, or trade opportunities from market imbalances created by these types of transactions. The arbitrage aspects of the Event Funds strategy involve an assessment of
the likelihood that the transaction will be consummated and the resulting determination of how large an exposure to acquire, as well as how and when to hedge such exposure. As of December 31, 2006, the Event Fund held approximately $2.1 billion
in assets under management, or approximately 50% of the Deephaven Funds assets under management. The employment contract of the portfolio manager of the Event Fund and event-driven strategies expired on December 31, 2006. Deephaven hired a new
portfolio manager for the Event Fund and event-driven strategies effective January 1, 2007.



Deephaven also manages other single-strategy funds as well as several separately managed accounts for institutional investors. As of December 31,
2006, these single-strategy funds and all separately managed accounts had, in aggregate, approximately $542 million of assets under management, comprising approximately 13% of the Deephaven Funds assets under management.



In order to offer additional product choices for its investor base, Deephaven
may, in the future, look to increase the number of single-strategy funds it manages. Deephaven is continuing to increase the allocation of its assets under management invested in Europe and Asia.



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Asset Management Competition



Deephaven competes primarily with other asset management companies that manage and sponsor multi-strategy, event-driven,
credit-driven, long short equity and volatility-driven portfolios. As Deephaven launches new single strategy funds, it will compete with other asset management companies with similar investment strategies. Competition is primarily based on
reputation, client relationships, the experience of the management team, investment strategies, risk profile, fee structures and historical fund returns. We believe that Deephavens status as a voluntary registered investment adviser also
differentiates our product offering and may enable Deephaven to attract additional assets under management from investors who previously would not invest in hedge funds managed by non-registered investment advisers.



There has been an on-going trend among fund management companies and
institutions to allocate more of their assets to hedge fund investments. This has influenced the growth of the hedge fund industry, as shown in the table below. The continued growth of the hedge fund industry may provide for greater competition in
the future.



|     |  |                                |  |                                                   |          
|---- |  | ------------------------------ |  | ------------------------------------------------- | ---------
|     |  | 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                          |  |                                                   | 1,426,710

---

Source: Hedge Fund Research, Inc. 2006 Industry
Report



Asset Management Infrastructure



In managing the Deephaven Funds, Asset Management 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.



Global Markets Segment



Business Segment Overview



We offer superior execution quality through natural liquidity, capital
facilitation and trading technology, with comprehensive products and services that support the capital formation process. We make a market or trade in nearly every U.S. equity security and provide trade execution services in a large number of
international securities, futures, options, foreign currencies and fixed income instruments. Our business model focuses on providing comprehensive trade execution services as well as superior client service. To do so, the model requires that we
manage risk 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 comes from making markets and providing trade execution 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 Nasdaq Intermarket, the over-the-counter (OTC) market for New York Stock Exchange (NYSE) and American Stock Exchange (AMEX) listed securities, and the OTC Bulletin Board, 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 also provide trade executions on an agency or riskless principal basis, generating commissions or commission equivalents, respectively. We execute the majority of our equity
transactions as principal.



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##### Table of Contents

Our domestic Global Markets activities are primarily transacted out of six subsidiaries, Knight Equity
Markets, L.P. (KEM), Knight Capital Markets LLC (KCM), Direct Trading Institutional, L.P. (Direct Trading), Direct Edge ECN LLC (Direct Edge), Hotspot FX, Inc. and its subsidiaries
(Hotspot) and ValuBond Securities, Inc. (ValuBond). KEM, KCM, Direct Trading, Direct Edge and ValuBond are all broker-dealers registered with the SEC and are members of the National Association of Securities Dealers
(NASD). ValuBond is also registered with the Municipal Securities Rulemaking Board (MSRB).



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 Financial Services Authority (FSA) that provides execution services for predominately European institutional and broker-dealer clients in U.S., European and international equities.
We intend to continue to expand our institutional business and product offerings in Europe in 2007.



Over the past two years, we have completed the following acquisitions of complementary businesses to strengthen our Global Markets business segment and
expand our product offerings:



| |  |  | In June 2005, the Company acquired, for cash, the business of Direct Trading, a privately held firm specializing in providing institutions with direct market access
trading through an advanced electronic platform, now known as Knight Direct. Upon the close of the transaction, the Company made a $40 million initial cash payment. The transaction also contains 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 quarter of 2006, the Company paid $12.7 million in additional consideration based on the profitability of the business during the first year of
operation after the closing of the acquisition. There is one additional contingent payment due in the third quarter of 2007 based on the profitability of the business during the second post-acquisition year of operation.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In October 2005, the Company acquired, for cash, the business of the ATTAIN ECN (now operating as Direct Edge), an alternative trading system that operates an
electronic communications network (ECN). The Direct Edge ECN provides a liquidity destination with the current ability to match trades in Nasdaq National Market, Nasdaq Small Cap and NYSE and AMEX listed securities by displaying orders
in the Nasdaq Market Center or the NASD Alternative Display Facility. The transaction closed with an initial cash payment and contains a four-year contingency from the date of closing for the payment of additional consideration based on meeting
certain revenue and client retention metrics.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In April 2006, the Company acquired, for $77.5 million in cash, Hotspot, a leading electronic foreign exchange marketplace that provides access to electronic
foreign exchange spot trade executions through an advanced ECN-based platform. 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 National Futures Association (NFA).
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



Clients and Products



Clients



Within Global Markets, we offer products and provide services primarily to
two main client groups: broker-dealers and institutions. Our broker-dealer clients primarily include global, national and regional broker-dealers and on-line brokers. Our institutional clients primarily 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 (which
include our Direct Edge ECN clients) each generated approximately 50% of our Global Markets revenues in 2006.



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In 2006, our largest broker-dealer client accounted for approximately 10.9% of the Global Markets
U.S. equity dollar value traded. No other client accounted for over 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 three years, we have worked to aggressively expand our product offering.



We offer institutions 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 market, we offer capital facilitation to complete our clients trades. Our institutional products include equity, futures, options
and foreign currency trade execution solutions, block trading, program trading, international equities, special situations/risk arbitrage, soft dollar and commission recapture programs (Donaldson), corporate services, technical research (Knight
Technical Research), direct market access (Knight Direct) and crossing networks (Knight Match). The majority of our revenues from institutional clients are commissions on agency transactions or commission-equivalents on riskless principal
transactions.



We seek to provide broker-dealers 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 execution services to our broker-dealer clients. We execute the majority of the order flow from broker-dealer clients as principal. The majority of the revenues we earn from broker-dealer clients are net trading revenues, generated
from the difference between the price paid when securities are bought and the price received when those securities are sold. We also provide fixed income and foreign currency trade executions to our broker-dealers clients.



Global Markets Competition



The securities industry is constantly evolving and intensely competitive, a
trend that we expect will continue. Our market-making product competes primarily with similar products offered by global, national, and regional broker-dealers, the NYSE, the AMEX, NASDAQ, regional exchanges and alternative trading systems, such as
ECNs and dark books. We have also experienced greater competition from market-making firms with highly automated, electronic trading models. Another source of competition comes from 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 and speed), client relationships, client service, payments for
order flow and technology. Over the past several years, regulatory changes, competition and the continued focus by 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 market-makers. Generally, improvements in execution quality, such as faster execution speed and greater price
improvement, negatively impact the ability to derive revenues from executing broker-dealer order flow. For example, we have made, and continue to make, changes to our execution protocols, which have had, or could have, a significant impact on our
profitability. To remain profitable, some market-makers 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. In 2005 and 2006, we significantly increased the amount of automation in our market-making business, and we now execute most of our trades on an automated basis.



Competition for order flow in the U.S. equity markets continues to be intense
in connection with publicly disclosed execution metrics; i.e., SEC Rules 605 and 606. These rules, applicable to broker-dealers, add greater



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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
the internet and through other alternative trading systems (for example, through ECNs, direct market access or crossing networks) has increased the pressure on trading commissions. It appears that this trend toward alternative trading systems will
continue. We may experience competitive pressures in these and other areas in the future as some of our competitors seek to obtain market share by reducing prices. Competition for business from institutional clients is based on a variety of factors,
including execution quality, equity research, reputation, soft dollar and commission recapture services, technology, client relationships, client service, cost and capital facilitation. Based on industry surveys, approximately 50% of institutional
equity commissions have historically been allocated to broker-dealers in exchange for either research or soft dollar and commission recapture services. These industry surveys also indicate that execution quality is one of the primary reasons why
institutions allocate commissions to broker-dealers other than for research or soft dollar and commission recapture services. With our acquisition of the business of Donaldson & Co. (Donaldson) in 2003, we strengthened the soft
dollar and commission recapture services we provide to our clients. In 2005, we also established a new research division, Knight Technical Research, to provide unbundled market analysis to our institutional client base. In the future, due partly to
the regulatory scrutiny over the past few years relating to equity research and the continued focus by investors on execution quality and overall transaction costs, we believe that a greater percentage of institutional commissions will be allocated
based on the quality of executions. However, there is no guarantee that this will occur.



Another factor contributing to the increase in competition for order flow is the significant mergers among U.S. market centers over the past several years, and the launch of independent ECNs and joint ventures with
regional stock exchanges. The effects of these mergers and the launch of new competition, 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 a significant amount of resources in order to expand our
execution capacity and upgrade our trading systems and infrastructure and plan to continue to make additional investments in technology in 2007. Our ability to identify and deploy emerging technologies that facilitate the execution of trades is key
to the successful execution of our business model. Not only has technology enhanced our capacity and ability to handle order flow faster, it has also been an important component of our strategy to comply with government regulations, achieve
competitive execution standards, increase trading automation and provide superior client service. In 2005, we automated the majority of our execution services for broker-dealer order flow through our internally developed quantitative models. We
continued this process in 2006 which contributed to the improvement of Global Markets financial results. We plan to enhance our use of technology and quantitative models to further automate our execution services.



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 and our proprietary direct market access technology, Knight Direct, provide our clients with an array of web-based tools to interact



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with our Global Markets trading systems and most U.S. equity, futures and options market centers. Broker-dealers, both foreign and domestic, use this
portal to send us order flow, access reports and use the other tools it offers to facilitate their business.



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.



Corporate Segment



The corporate segment includes all costs not associated with our two primary operating 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, directors fees, investor and public
relations expenses and directors and officers insurance. This segment also includes the investment income earned on our strategic investments and our corporate investment in the Deephaven Funds. The results from our Corporate segment
were positively impacted in 2005 and 2006 by realized gains from the sales of our strategic equity investments in the International Securities Exchange, Inc. (ISE) and the Nasdaq Stock Market, Inc. (Nasdaq).



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 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 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, NASD, FSA, CFTC, MSRB, NFA, other self-regulatory organizations (commonly known as SROs), and other regulatory bodies, such as state securities commissions, promulgate
numerous rules and regulations. 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 subject to several
of these matters as further described in Legal Proceedings in Part I, Item 3 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, NASD, CFTC, MSRB, NFA and corresponding market structure changes, can have, and have had an impact on the Companys regulated
subsidiaries by directly affecting our method of operation and profitability. Legislation such as the USA PATRIOT Act of 2001 has imposed significant obligations on broker-dealers and mutual funds. 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 segment is subject to constant change. Our
business, financial condition and operating results may be adversely affected as a result of new or



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revised legislation or regulations imposed by the U.S. Congress, the SEC, CFTC, other United States or foreign governmental regulatory authorities, the NASD,
the NFA and other SROs or 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. For example, in June 2005, the SEC adopted rules under its Regulation NMS designed to modernize and strengthen the regulatory structure of the U.S. equity
markets. Although many components of Regulation NMS may strengthen our national market system, certain components of the proposal (i.e., the trade-through rule) may have the potential for causing greater harm than good to the marketplace. Moreover,
it is possible that Regulation NMS and its associated rules could negatively impact our Global Markets business. Regulation NMS is scheduled to begin implementation in March 2007. The recent expansion of many regional exchanges, in which several
exchanges are seeking to create their own alternative trading systems (e.g., ECNs) and compete in the OTC and listed trading venues, as well as other independent ECNs, could also negatively impact our Global Markets business.



We have foreign based subsidiaries. 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 ability to conduct business or expand internationally. For example, the Markets in
Financial Instruments Directive (MiFID) adopted by the European Commission, is scheduled for implementation in November 2007. MiFID represents one of the more significant changes to take place in the operation of European capital
markets. It is possible that MiFID and its associated rules and directives could negatively impact our Global Markets business.



Our Asset Management subsidiary, 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 compared to those prior to registration. 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/NFA regulations. Deephavens U.K. subsidiary is regulated by the FSA and Deephavens Hong
Kong subsidiary is regulated by the Hong Kong Securities and Futures Commission.



The Company believes that it is 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 the NASD and other regulatory bodies, and ultimately could require the firm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.



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



During 2006, our significant broker-dealer
subsidiaries, including KEM and KCM, were in compliance with their capital adequacy requirements. For additional discussion related to net capital, see Footnote 19 Net Capital Requirements included in Part II, Item 8 Financial
Statements and Supplementary Data of this document.



Employees



As of December 31, 2006, our headcount was 844
full-time employees, compared to 720 full-time employees at December 31, 2005. The increase in headcount is primarily related to expansion of our Global Markets offering through the addition of the businesses of Hotspot and ValuBond in 2006. Of
our 844 full-time employees at December 31, 2006, 772 were employed in the U.S. and 72 outside the U.S., primarily in the United Kingdom. None of our employees are 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. These include, but are not limited to, the
following:



| |  | Our business could be harmed by adverse economic, political and market conditions
|- |  | ---------------------------------------------------------------------------------



The securities business generally is, by its nature, volatile. It is directly affected by numerous national and
international factors that are beyond our control, including, among others, economic and political conditions; market sentiment; the availability of short-term and long-term funding and capital; the level and volatility of interest rates;
legislative and regulatory changes; changes in currency and commodity values; and inflation. Any one or more of these factors may contribute to reduced levels of activity in the securities markets generally, or increased market volatility, which
could result in lower revenues in both our Global Markets and Asset Management segments. Any reduction in revenues or any loss resulting from the above factors could have a material adverse effect on the Companys businesses, financial
condition and operating results.



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



The securities industry in the United States is subject to extensive oversight under federal, state and applicable
international laws as well as SRO rules. Broker-dealers 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; changes in rules promulgated by the SEC, CFTC, FSA, the NASD and other SROs or regulatory bodies; and
changes in the interpretation or enforcement of existing laws 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 broker-dealer, FCM or asset manager and/or their officers, supervisors or registered employees. Our ability to comply with applicable laws and
rules is largely dependent on our internal system 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 claimed noncompliance.



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



The SEC, CFTC, FSA, the NASD and other SROs are constantly proposing, or enacting, new regulations for the marketplace. For example, in June 2005, the SEC adopted rules under its Regulation NMS designed to



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modernize and strengthen the regulatory structure of the U.S. equity markets. Although many components of Regulation NMS may strengthen our national market
system, certain components of the proposal (e.g., the trade-through rule) may have the potential for creating greater harm than good to the marketplace. Regulation NMS is scheduled to begin implementation in March 2007. MiFID, which is scheduled for
implementation in November 2007, represents one of the more significant changes to take place in the operation of European capital markets. It is possible that Regulation NMS and MiFID, and their associated rules, could negatively impact our Global
Markets business.



In regards to our Asset Management business,
market disruptions and the dramatic increase in the capital allocated to alternative investment strategies during recent years have led to increased governmental as well as self-regulatory scrutiny of the hedge fund industry in general, and certain
legislation proposing greater regulation of the industry periodically is considered or adopted by the U.S. Congress, as well as the Department of Labor, which enforces the Employee Retirement Income Security Act of 1974 to which Deephaven is
subject, and certain U.S. regulatory entities and the governing bodies of non-U.S. jurisdictions. For example, the SEC enacted new rules that required most investment advisers to hedge funds, including Deephaven, to register as investment advisers
by February 1, 2006 which resulted in additional responsibilities and obligations on Deephavens business. Deephaven became a registered investment advisor in January 2006. Although the SEC rule on hedge fund adviser registration under the
Investment Advisers Act was ultimately overturned, Deephaven has elected to continue as a registered investment adviser. It is impossible to predict what, if any, changes in regulation applicable to Deephaven or the funds it manages, the markets in
which they trade and invest or the counterparties with whom they do business may be instituted in the future. Any such regulation could negatively impact the profit potential of our Asset Management business.



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



| |  | 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 2008, and certain Deephaven managers, 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.



The Deephaven Managers have entered into new employment agreements, which became effective on January 1, 2007. These agreements are for three years
and include a right of renewal by the Deephaven Managers through 2012 under certain circumstances. In the event that these agreements are not renewed by the Deephaven Managers or we lose the services of any of these senior managers, it 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, 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.



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| |  | Risk of losses associated with our Global Markets and Asset Management businesses
|- |  | ---------------------------------------------------------------------------------



We conduct our market-making activities predominantly as principal, which subjects our capital to significant risks. These
activities involve the purchase, sale or short sale of securities 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 we purchase or to repurchase securities we sell in such transactions. From time to time, we may have large position concentrations in securities 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 market-making activities primarily depends upon our ability to attract order flow, the amount of, and volatility in, our
quantitative market-making and program trading portfolios, the performance of our quantitative market-making models, the skill of our trading personnel, general market conditions, effective hedging strategies, the price volatility of specific
securities and the availability of capital. To attract order flow, we must be competitive on price, size of securities positions 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.



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.



| |  | Our future operating results may fluctuate significantly
|- |  | --------------------------------------------------------



We may experience significant variation in our future results of operations. These fluctuations may result from, among other things, introductions of
or enhancements to trade execution services by us or our competitors; the value of our securities positions and our ability to manage the risks attendant thereto; the volume of our market-making activities; the dollar value of securities traded;
volatility in the securities markets; our market share with institutional and broker-dealer clients; the performance, amount of, and volatility in, our quantitative market-making and program trading portfolios; the performance of our international
operations; 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; the addition or loss of executive management and asset management, sales, trading and technology
professionals; legislative, legal and regulatory changes; legal and regulatory matters; geopolitical risk; the amount and timing of capital expenditures, acquisitions and divestitures; 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 and revenue capture in our Global Markets segment, and increases in our fund returns and assets under management in our Asset Management segment. If demand for
our services declines in either of our two operating business segments 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. There also
can be no assurance that we will be able to return to the rates of revenue growth that we have experienced in the past or that we will be able to improve our operating results.



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At December 31, 2006, the Company held a corporate investment of approximately $188 million in the
Deephaven Funds. A decline in the Deephaven Funds returns could also have a material adverse effect on the value of our corporate investment and our operating results.



| |  | Our Asset Management business is subject to many risks
|- |  | ------------------------------------------------------



Our Asset Management business is subject to a variety of risks. These risks include, but are not limited to, the departure of key management,
redemptions by investors, volatility of the funds returns and regulatory or legislative changes and proceedings.



Investors in the Deephaven Funds may generally redeem their investments upon relatively short notice, subject to certain withdrawal restrictions.
Management changes or poor performance relative to other investment management firms tend to result in increased redemptions, the loss of accounts, and potentially significant limitations on Deephavens ability to raise new assets. During a
declining market, the pace of these redemptions and withdrawal of assets may accelerate. Regulatory proceedings can impact the ability to raise funds and may increase redemptions. Redemptions could have a material adverse effect on the value of our
investment in the Deephaven Funds and our results of operations.



In light of the recent announcement of the agreements with the Deephaven Managers completed in December 2006 and the resulting changes to the Deephaven management team, Deephaven and its management team have been actively working to meet
with investors in the Deephaven Funds to explain the transactions and changes, and to address any questions or concerns the investors may have and to communicate Deephavens strategies and perspectives for 2007 and beyond. As is expected and
common in these circumstances, Deephaven received redemption notices from certain investors following the announcement of the agreements and the change in portfolio manager for the Deephaven Event Fund. At this time, the Company believes, based on
information currently available, that pending redemptions, offset by expected incoming investments, are not expected to have a material adverse effect on the results of our operations.



As of December 31, 2006, approximately 38% of the Deephaven Funds assets under management were in the Deephaven
Market Neutral Funds (Market Neutral Fund). The investment philosophy for the Market Neutral 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 Market Neutral 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. Its returns are primarily
dependent upon equity trading volumes, equity volatility, mergers and acquisitions and secondary offering activity in the capital markets, and credit spread relationships, among other factors. Within the Market Neutral Fund, Deephaven generally
employs a variety of investment strategies, including event-driven, volatility-driven, fundamental equity, credit-driven and global macro strategies among others. There is no material limitation on the types of investment strategies that may be
employed by the Market Neutral Fund.



There will be unhedged
asset factor risks (i.e. equity, credit, interest rate, foreign exchange) in the Market Neutral 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 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



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



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



Over the last two years, we have undertaken several strategic acquisitions,
including the completed acquisitions of Direct Trading, Direct Edge, Hotspot, and ValuBond. We intend to continue to pursue strategic acquisitions of, or investments in, businesses and technologies. Acquisitions may entail numerous risks, including
difficulties in assessing values for acquired businesses 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.



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



We derive substantially all of our revenues from Global Markets and Asset
Management activities. The market for these services is constantly evolving and intensely competitive, a trend that we expect will continue. We face direct competition in our Global Markets business primarily from global, national and regional
broker-dealers, and also alternative trading systems, including other ECNs. Competition is primarily on the basis of our execution standards (including price, liquidity and speed), client relationships, reputation, 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 client base. These competitors may be able to respond more quickly than us 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.



In our Asset Management business we primarily compete with hedge funds and other asset management companies. Competition is based primarily on our
reputation, client relationships, the experience of the management team, investment strategies, risk profile, fee structures and historical fund returns. Many of our competitors may have substantially greater financial resources as well as larger
research and trading staffs than those available to Deephaven. These greater resources may be a particularly important competitive advantage given the highly technical, quantitative analysis required for operating a multi-strategy asset management
firm. Competitive investment activity by other firms tends to reduce the Deephaven Funds opportunity for profit. The amount of capital committed to alternative investment strategies (i.e., hedge funds) has increased dramatically during recent
years. The profit potential of the Deephaven Funds may be materially reduced as a result of the proliferation of alternative investment entities in competition with Deephaven.



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 major clients
|- |  | ---------------------------------------------------------------------------------



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At times, a limited number of Global Markets clients have accounted for a significant portion of our
equity and institutional order flow, revenues and profitability, and we expect a large portion of the future demand for, and profitability from, our Global Markets trading and market-making services to remain concentrated within a limited number of
clients. None of our clients is contractually obligated to utilize us as a market-maker and, accordingly, these clients may direct their trading activities to other market-makers 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 trading and market-making activities. In 2006, one client
accounted for 10.9% of our total U.S. equity dollar value traded in our Global Markets segment. Our Asset Management segment also has a limited number of investors, though, as of December 31, 2006, there was no institution that accounted for
more than 10% of the Deephaven Funds assets under management. 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.



| |  | Our business is subject to substantial risk from litigation, regulatory investigations and potential securities laws liability
|- |  | ------------------------------------------------------------------------------------------------------------------------------



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, the NASD, the Department of Labor, the FSA, the CFTC and other U.S. and non-U.S.
SROs and regulatory bodies. 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, securities 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, significant legal expenses could be incurred. An adverse resolution of any current or future lawsuits, legal or regulatory
proceedings or claims against us could have a material adverse effect on the Companys business, financial condition and operating results.



| |  | Our revenues may be negatively impacted by declines in market volume, volatility, price or liquidity
|- |  | ----------------------------------------------------------------------------------------------------



Our Global Markets revenues may decrease in the event of a decline in market
volume, volatility, prices or liquidity. Declines in the volume of securities transactions and in market liquidity generally result in lower revenues from market-making activities. Lower price levels of securities may also result in reduced revenue
capture, and thereby reduced revenues from market-making transactions, as well as result in losses from declines in the market value of securities held in inventory. Sudden sharp declines in market values of securities can result in illiquid
markets, declines in the market values of securities held in inventory, the failure of buyers and sellers of securities to fulfill their obligations and settle their trades, and increases in claims and litigation. Our Asset Management business could
be similarly impacted. Any decline in market volume, price or liquidity or any other of these factors could have a material adverse effect on our business, financial condition and operating results.



| |  | Our revenues may be negatively impacted by factors that adversely affect our trade execution activities and the credit risks associated with our clearing brokers
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



The majority of our revenues are derived
from our Global Markets business. We expect this to continue for the foreseeable future. Any factor adversely affecting trading and market-making in general, or our market-making activities in particular, could adversely affect our business,
financial condition and operating results. Our future success will depend on continued demand for our trading and market-making services and our ability to



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respond to regulatory and technological changes, as well as client demands. If demand for our trading and market-making services fails to grow, grows more
slowly than we anticipate, or declines, our business, financial condition and operating results could be materially and adversely affected.



As a market-maker of OTC and listed equities, the majority of our securities transactions are conducted as principal with broker-dealer and institutional
counterparties located in the United States. We clear the majority of our securities transactions 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 Global Markets. 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, or failure by a clearing broker to remain solvent, or any event adversely affecting the clearing brokers, could
have a material adverse effect on our business, financial condition and operating results.



| |  | 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.



| |  | 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 and 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, especially our largest clients, or a reduction in the growth of our client base, increased operating expenses,
financial losses, additional litigation or other client claims, and regulatory sanctions or additional regulatory burdens.



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In addition, 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 steps to develop, implement and maintain reasonable business continuity plans, the Company cannot guarantee our systems will absolutely recover after a significant business disruption. If we are prevented from using any of
our current trading operations 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.



| |  | 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 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.



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.



The Company incurred $8.5 million of Writedown of assets and lease loss accruals in 2006, primarily related to excess real estate capacity at the Companys 545 Washington Boulevard facility in Jersey City, N.J.,
encompassing approximately 78,000 square feet, all of which is unoccupied. The Company engaged a real estate broker to sub-lease this excess space, but to date our efforts to sublet this space have not been successful. This accrual was derived from
assumptions and estimates based on lease terms of an anticipated sub-lease agreement, which assumed a sub-lease would commence in the beginning of 2008, 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, securities
arbitrations, administrative claims and regulatory reviews and investigations arising in connection with the conduct of our businesses. We are also 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.



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Legal



Short Selling LitigationKEM and/or the Company, sometimes together with other broker-dealer defendants, have
been named in actions in which it was generally alleged that the firm improperly engaged in short sales transactions concerning securities of certain issuers. In general, the plaintiffs in all of these lawsuits are limited to either the issuer
and/or a shareholder of the underlying security. Certain of these cases have been dismissed and others are in various stages of the litigation process. The one case currently pending in a trial court is H-Quotient, Inc. v. Knight Trading Group,
Inc. and Knight Securities, L.P. in the United States District Court for the Southern District of New York. In Sporn et al. v. Elgindy et al,which had been filed in the United States District Court for the Central District of California,
the court dismissed, with prejudice, the claims against the Company, and the plaintiffs filed a notice of appeal in the Ninth Circuit Court of Appeals. The Ninth Circuit remanded the case to the District Court on the grounds that there was no final
appealable judgment. The plaintiffs action against certain remaining defendants continues. In ATSI v. The Shaar Fund, Ltd. Et al.,which had been pending in the United States District Court for the Southern District of New York, the
court dismissed, with prejudice, the claims against the Company, and plaintiffs appealed to the Second Circuit. That appeal remains pending.



KEM Trading Dispute ArbitrationOn February 28, 2005, KEM filed an arbitration claim with NASD Dispute Resolution, Inc. against a trading
counterparty and one of its registered representatives seeking recovery of approximately $6.5 million, representing the amount KEM believes it is owed by this counterparty in a trading dispute regarding the counterpartys receipt of dividends
on stocks traded for same-day settlement during the ex-dividend period (the KEM Trading Dispute Arbitration). In March 2005, a customer of the counterparty in the KEM Trading Dispute Arbitration filed an action in New York State Supreme
Court against KEM seeking declaratory relief that the customer is the rightful owner of the dividends paid to them. In October 2005, KEMs counterparty asserted claims in the KEM Trading Dispute Arbitration in the nature of an interpleader
against its customer and KEM, requesting that the panel determine the rights to the disputed dividends. KEM has asserted counterclaims in the Supreme Court action. Hearings were held in the arbitration matter in January 2007, and additional hearing
dates are scheduled for later in 2007. The Supreme Court action has been stayed pending completion of the arbitration.



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 from September 11, 2000 through the present day 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 have 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 have moved to dismiss the amended complaint. In September 2006,
the district court dismissed, with prejudice, the 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. These motions remain pending. In October 2006, plaintiffs filed a
Notice of Appeal with the Seventh Circuit Court of Appeals from this decision and judgment and from decisions and orders of the district court issued in 2005 dismissing the original complaints filed in this and related cases. The Notice of Appeal is
stayed until plaintiffs post-trial motions are disposed of by the district court.



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Gurfein etc. v. Ameritrade, Inc. et al.This putative class action was filed in the United
States District Court for the Southern District of New York in December 2004, alleging that the Company, various specialist firms, broker-dealers and the American Stock Exchange violated common law and the securities laws by, among other things,
failing to execute limit orders for options at quoted prices and by executing market orders for options at prices less favorable than the actual market price. The plaintiff seeks unspecified monetary damages and injunctive relief. The Company is
seeking indemnification for this matter under contractual arrangements with a third party, although there is no guarantee that it will be successful in obtaining such indemnification. In January 2006, the court dismissed the case with prejudice
against the American Stock Exchange and without prejudice against the remaining defendants. In March 2006, plaintiff filed a Second Amended Complaint. The Second Amended Complaint asserts no claim against any Knight defendant.



Regulatory



The Company owns 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. The Company
makes these changes while continuously endeavoring to comply with many complex laws and rules. Compliance, surveillance or trading issues, common in the securities industry, and which are monitored or reported to the SEC, CFTC or SROs, are reviewed
in the ordinary course of business by our primary regulators, the SEC, NASD, FSA, CFTC, MSRB and NFA. The Company, as a major order flow execution destination, is named from time to time in, or is asked to respond to a number of regulatory matters
brought by U.S. regulators, foreign regulators and SROs that arise from its 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 or SRO
disciplinary action and/or civil or administrative action.



As
disclosed in the Companys Form 10-K filing for the year ended December 31, 2005, and in subsequent SEC filings in May 2006, Deephaven announced that it had concluded a settlement with the SEC in connection with trading activity associated
with certain Private Investments in Public Equities (PIPEs). Without admitting or denying the allegations in the SECs complaint, and as part of the settlement, Deephaven was required to disgorge approximately $2.7 million, pay
approximately $343,000 in pre-judgment interest and pay approximately $2.7 million as a civil penalty. In May 2006, these amounts were paid to the Clerk of the Court. The settlement resolved the matters for which Deephaven received the Wells Notice
from the staff of the SEC in June 2005. The former Deephaven employee who also received a Wells Notice settled the allegations made by the SEC against him. Deephaven was not responsible for the penalties assessed against the former employee.



As disclosed in our amended Annual Report on Form 10-K/A for
the year ended December 31, 2004, on December 16, 2004, Knight Securities L.P., (KSLP, now known as KEM) concluded a settlement with the SEC and the NASD (the Settlement). The Settlement resolved the matters for
which KSLP received Wells Notices from the staffs of the SEC and NASD but did not address Wells Notices received by certain former employees of KSLP. In March 2005, NASD announced that it had charged Kenneth Pasternak, former CEO of KSLP, 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. The administrative
hearing in the NASD matter has been concluded. A decision has not yet been issued. 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. The SEC matter is still pending.



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 subsidiary, Knight Financial Products LLC, during the period of time that the
subsidiary conducted the Derivative Markets business prior to its 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 1999-2005. The Company responded to this request and is cooperating with the staff of the SEC and certain regional exchanges to resolve this matter.



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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 as a consolidated group of regulated broker-dealers providing execution and
trading services. 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.



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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 Stock Market LLC 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 sales price per share of the Class A Common Stock as
reported by the NASDAQ Global Select Market:



|               |  |      |       |     |   |      
|-------------- |  | ---- | ----- | --- | - | -----
|2006           |  | High |       | Low
|               | 
|First Quarter  |  | $    | 14.09 |     | $ | 8.99 
|Second Quarter |  |      | 17.40 |     |   | 13.15
|Third Quarter  |  |      | 18.47 |     |   | 13.75
|Fourth Quarter |  |      | 20.51 |     |   | 15.98
|               |  |     
|2005           |  |      |       |    
|First Quarter  |  |      | 10.99 |     |   | 9.35 
|Second Quarter |  |      | 9.69  |     |   | 7.28 
|Third Quarter  |  |      | 8.94  |     |   | 7.40 
|Fourth Quarter |  |      | 10.90 |     |   | 7.87 



The closing sale price
of our Class A Common Stock as reported by the NASDAQ Global Select Market on February 27, 2007, was $15.42 per share. As of that date there were approximately 690 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 44,000 beneficial holders of our Class A Common Stock.



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.



The following table contains information about our purchases
of Class A Common Stock during the fourth quarter of 2006:



|                                     |  |                                 |  |                             |       |                                                                                  |           |                                                                                       |   |            
|------------------------------------ |  | ------------------------------- |  | --------------------------- | ----- | -------------------------------------------------------------------------------- | --------- | ------------------------------------------------------------------------------------- | - | -----------
|Period(1)                            |  | Total Number ofShares Purchased |  | Average PricePaid per Share |       | Total Number of SharesPurchased as Part ofPublicly AnnouncedPlans or Programs(2) |           | Approximate DollarValue of Shares That MayYet Be Purchased Underthe Plans or
Programs
|October 1, 2006 - October 31, 2006   |  | 401,962                         |  | $                           | 18.88 |                                                                                  | 400,000   |                                                                                       | $ | 158,743,271
|                                     |  |                                 |  |                            
|November 1, 2006 - November 30, 2006 |  | 1,550,000                       |  |                             | 17.75 |                                                                                  | 1,550,000 |                                                                                       |   | 131,237,700
|                                     |  |                                 |  |                            
|December 1, 2006 - December 31, 2006 |  | 181,490                         |  |                             | 17.68 |                                                                                  | 180,400   |                                                                                       |   | 128,050,935
|                                     |  |                                 |  |                             |       |                                                                                  |           |                                                                                       |   |            
|Total                                |  | 2,133,452                       |  |                             | 17.95 |                                                                                  | 2,130,400 |                                                                                       |   |            
|                                     |  |                                 |  |                             |       |                                                                                  |           |                                                                                       |   |            

---

|(1) |  | As a matter of policy, the Company does not repurchase its Class A Common Stock during self-imposed closed window periods.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

|(2) |  | 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 $460 million to a total of $495 million 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 and April 18, 2006. The Company may repurchase shares in the open market or through privately negotiated transactions, depending on
prevailing market conditions, alternative use of capital and other factors. The repurchase program has no set expiration or termination date.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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 2006, 2005 and 2004 and the Consolidated Statements of Financial Condition Data at December 31, 2006 and 2005 have been derived from our
audited Consolidated Financial Statements included elsewhere in this document. The Consolidated Statements of Operations Data for 2003 and 2002 and the Consolidated Statements of Financial Condition Data at December 31, 2004, 2003 and 2002 are
derived from Consolidated Financial Statements not included in this document.



|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|-------------------------------------------------------------------------------- |  | ----------------------------------------------- | ----------- | ---- | - | ----------- |  | - | ----------- | - |  | ---- | ----------- | - |  | - | ----------- | -
|                                                                                 |  | For the years ended December 31,                |            
|                                                                                 |  | 2006                                            |             | 2005 |   | 2004        |  |   | 2003        |   |  | 2002 |            
|Consolidated Statements of Operations Data (1):                                  |  | (In thousands, except share and per share data) |            
|Revenues                                                                         |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Commissions and fees                                                             |  | $                                               | 405,315     |      | $ | 296,222     |  | $ | 276,011     |   |  | $    | 163,147     |   |  | $ | 75,599      |  
|Net trading revenue                                                              |  |                                                 | 243,761     |      |   | 165,614     |  |   | 250,993     |   |  |      | 290,938     |   |  |   | 269,323     |  
|Asset management fees                                                            |  |                                                 | 213,887     |      |   | 89,227      |  |   | 77,658      |   |  |      | 57,903      |   |  |   | 34,510      |  
|Interest and dividends, net                                                      |  |                                                 | 16,027      |      |   | 9,019       |  |   | 4,647       |   |  |      | 3,657       |   |  |   | 5,357       |  
|Investment income and other                                                      |  |                                                 | 72,219      |      |   | 74,541      |  |   | 16,441      |   |  |      | 30,264      |   |  |   | 13,199      |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Total revenues                                                                   |  |                                                 | 951,209     |      |   | 634,623     |  |   | 625,750     |   |  |      | 545,909     |   |  |   | 397,988     |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Transaction-based expenses                                                       |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Execution and clearance fees                                                     |  |                                                 | 106,908     |      |   | 99,427      |  |   | 111,788     |   |  |      | 102,659     |   |  |   | 85,917      |  
|Soft dollar and commission recapture                                             |  |                                                 | 65,458      |      |   | 63,671      |  |   | 60,118      |   |  |      | 9,986       |   |  |   | 7,372       |  
|Payments for order flow and ECN rebates                                          |  |                                                 | 42,191      |      |   | 21,220      |  |   | 36,632      |   |  |      | 32,179      |   |  |   | 36,306      |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Total transaction-based expenses                                                 |  |                                                 | 214,557     |      |   | 184,318     |  |   | 208,538     |   |  |      | 144,824     |   |  |   | 129,595     |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Revenues, net of transaction-based expenses                                      |  |                                                 | 736,652     |      |   | 450,305     |  |   | 417,212     |   |  |      | 401,085     |   |  |   | 268,393     |  
|                                                                                 |  |                                                 |             |      |  
|Other direct expenses                                                            |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Employee compensation and benefits                                               |  |                                                 | 352,353     |      |   | 229,460     |  |   | 244,550     |   |  |      | 206,860     |   |  |   | 169,044     |  
|Communications and data processing                                               |  |                                                 | 33,119      |      |   | 32,513      |  |   | 28,896      |   |  |      | 27,992      |   |  |   | 31,077      |  
|Depreciation and amortization                                                    |  |                                                 | 20,641      |      |   | 16,355      |  |   | 14,248      |   |  |      | 19,385      |   |  |   | 26,658      |  
|Professional fees                                                                |  |                                                 | 20,568      |      |   | 19,555      |  |   | 14,915      |   |  |      | 10,993      |   |  |   | 16,384      |  
|Business development                                                             |  |                                                 | 14,343      |      |   | 6,419       |  |   | 8,269       |   |  |      | 7,160       |   |  |   | 6,852       |  
|Occupancy and equipment rentals                                                  |  |                                                 | 13,536      |      |   | 13,554      |  |   | 16,852      |   |  |      | 17,449      |   |  |   | 21,554      |  
|Writedown of assets and lease loss accrual                                       |  |                                                 | 8,480       |      |   | 10,055      |  |   | 3,810       |   |  |      | 16,508      |   |  |   | 15,423      |  
|Regulatory charges and related matters                                           |  |                                                 |            |      |   | 5,703       |  |   | 79,342      |   |  |      |            |   |  |   |            |  
|International charges                                                            |  |                                                 |            |      |   |            |  |   |            |   |  |      |            |   |  |   | 31,221      |  
|Other                                                                            |  |                                                 | 17,101      |      |   | 11,540      |  |   | 6,844       |   |  |      | 11,152      |   |  |   | 13,771      |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Total other direct expenses                                                      |  |                                                 | 480,141     |      |   | 345,154     |  |   | 417,726     |   |  |      | 317,499     |   |  |   | 331,984     |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Income (loss) before income taxes, minority interest and discontinued operations |  |                                                 | 256,511     |      |   | 105,151     |  |   | (514        | ) |  |      | 83,586      |   |  |   | (63,591     | )
|Income tax expense (benefit)                                                     |  |                                                 | 98,165      |      |   | 38,912      |  |   | 9,258       |   |  |      | 32,497      |   |  |   | (20,139     | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Income (loss) before minority interest and discontinued operations               |  |                                                 | 158,346     |      |   | 66,239      |  |   | (9,772      | ) |  |      | 51,089      |   |  |   | (43,452     | )
|Minority interest in consolidated subsidiaries                                   |  |                                                 |            |      |   |            |  |   |            |   |  |      |            |   |  |   | 5,101       |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Net income (loss) from continuing operations                                     |  | $                                               | 158,346     |      | $ | 66,239      |  | $ | (9,772      | ) |  | $    | 51,089      |   |  | $ | (38,351     | )
|Income (loss) from discontinued operations, net of tax                           |  | $                                               |            |      | $ | 122         |  | $ | 100,904     |   |  | $    | (13,016     | ) |  | $ | (4,886      | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Net income (loss)                                                                |  | $                                               | 158,346     |      | $ | 66,361      |  | $ | 91,132      |   |  | $    | 38,073      |   |  | $ | (43,237     | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Basic earnings per share from continuing operations                              |  | $                                               | 1.56        |      | $ | 0.64        |  | $ | (0.09       | ) |  | $    | 0.46        |   |  | $ | (0.32       | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Diluted earnings per share from continuing operations                            |  | $                                               | 1.49        |      | $ | 0.62        |  | $ | (0.08       | ) |  | $    | 0.43        |   |  | $ | (0.32       | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Basic earnings per share from discontinued operations                            |  | $                                               |            |      | $ |            |  | $ | 0.90        |   |  | $    | (0.12       | ) |  | $ | (0.04       | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Diluted earnings per share from discontinued operations                          |  | $                                               |            |      | $ |            |  | $ | 0.86        |   |  | $    | (0.11       | ) |  | $ | (0.04       | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Basic earnings per share                                                         |  | $                                               | 1.56        |      | $ | 0.64        |  | $ | 0.81        |   |  | $    | 0.34        |   |  | $ | (0.36       | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Diluted earnings per share                                                       |  | $                                               | 1.49        |      | $ | 0.62        |  | $ | 0.77        |   |  | $    | 0.32        |   |  | $ | (0.36       | )
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Shares used in computation of basic earnings per share                           |  |                                                 | 101,420,428 |      |   | 103,455,791 |  |   | 112,423,158 |   |  |      | 112,023,419 |   |  |   | 120,771,786 |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  
|Shares used in computation of diluted earnings per share                         |  |                                                 | 106,242,653 |      |   | 106,881,855 |  |   | 117,636,085 |   |  |      | 117,749,743 |   |  |   | 120,771,786 |  
|                                                                                 |  |                                                 |             |      |   |             |  |   |             |   |  |      |             |   |  |   |             |  



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##### Table of Contents

|                                                            |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|----------------------------------------------------------- |  | ------------ | --------- | ---- | - | --------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|                                                            |  | December 31,
|                                                            |  | 2006         |           | 2005 |   | 2004      |  | 2003 |           | 2002
|Consolidated Statements of Financial Condition Data:        |  |              |           |      |   |           |  |      |           |      |   |           |  |   |          
|Cash and cash equivalents                                   |  | $            | 214,760   |      | $ | 230,591   |  | $    | 445,539   |      | $ | 249,998   |  | $ | 236,629  
|Securities owned, held at clearing brokers, at market value |  |              | 711,775   |      |   | 380,367   |  |      | 254,473   |      |   | 201,239   |  |   | 143,357  
|Investment in Deephaven sponsored funds                     |  |              | 187,573   |      |   | 281,657   |  |      | 215,330   |      |   | 197,605   |  |   | 148,688  
|Assets within discontinued operations                       |  |              |          |      |   |          |  |      |          |      |   | 2,938,223 |  |   | 2,411,285
|Total assets                                                |  |              | 2,028,214 |      |   | 1,416,016 |  |      | 1,394,020 |      |   | 3,960,228 |  |   | 3,174,058
|Securities sold, not yet purchased, at market value         |  |              | 693,071   |      |   | 345,457   |  |      | 221,421   |      |   | 173,119   |  |   | 84,715   
|Liabilities within discontinued operations                  |  |              |          |      |   |          |  |      |          |      |   | 2,808,167 |  |   | 2,200,504
|Total stockholders equity                                  |  |              | 962,487   |      |   | 823,448   |  |      | 851,202   |      |   | 787,096   |  |   | 753,832  

---

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



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##### 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 voice and electronic 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. We continually apply knowledge and innovation to the trading and asset management processes to build lasting client partnerships through consistent
performance and superior client service. We have two operating business segments, Asset Management and Global Markets, as well as a Corporate segment.



| |  |  | Asset ManagementOur Asset Management business, Deephaven, is a global, multi-strategy alternative investment manager focused on delivering attractive
risk-adjusted returns with low correlation to the broader markets for institutions and private clients. Assets under management were $4.2 billion as of December 31, 2006, up from $2.9 billion of assets under management as of December 31,
2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Global MarketsOur Global Markets business offers superior execution quality through natural liquidity, capital facilitation and trading technology,
with comprehensive products and services that support the capital formation process. We make a market or trade in nearly every U.S. equity security and provide trade execution services in a large number of international securities, futures, options,
foreign currencies and fixed income instruments.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Companys Corporate segment includes all corporate overhead expenses and investment income earned on strategic investments and our corporate investment in funds managed by the Asset Management segment (the Deephaven
Funds). 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.



In December 2004, the Company completed the sale of one of its business segments, Derivative Markets, to Citigroup Financial Products Inc.
(Citigroup). In accordance with generally accepted accounting principles (GAAP), the results of this segment have been included within discontinued operations for 2005 and 2004. For a further discussion of the sale of the
Companys Derivative Markets business, see Footnote 9 Discontinued Operations included in Part II, Item 8 Financial Statements and Supplementary Data of this document.



The following table sets forth: (i) Revenues, (ii) Expenses
excluding Regulatory charges and related matters and Writedown of assets and lease loss accrual (Operating Expenses) and (iii) Income (loss) from continuing operations before Regulatory charges and related matters and Writedown of
assets and lease loss accrual and income taxes (Pre-Tax Operating Earnings) of our segments and on a consolidated basis (in millions):



|                           |  |                                  |       |      |   |       |  |   |       |  
|-------------------------- |  | -------------------------------- | ----- | ---- | - | ----- |  | - | ----- | -
|                           |  | For the years ended December 31, |      
|                           |  | 2006                             |       | 2005 |   | 2004  | 
|Asset Management           |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  | $                                | 214.9 |      | $ | 89.8  |  | $ | 78.2  |  
|Operating Expenses         |  |                                  | 140.0 |      |   | 63.2  |  |   | 48.6  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                  | 74.8  |      |   | 26.5  |  |   | 29.6  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Global Markets             |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  |                                  | 669.7 |      |   | 470.7 |  |   | 531.0 |  
|Operating Expenses         |  |                                  | 510.9 |      |   | 425.6 |  |   | 461.1 |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                  | 158.8 |      |   | 45.1  |  |   | 69.9  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Corporate                  |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  |                                  | 66.6  |      |   | 74.2  |  |   | 16.6  |  
|Operating Expenses         |  |                                  | 35.3  |      |   | 24.9  |  |   | 33.5  |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  |                                  | 31.4  |      |   | 49.3  |  |   | (16.9 | )
|                           |  |                                  |       |      |   |       |  |   |       |  
|Consolidated               |  |                                  |       |      |   |       |  |   |       |  
|Revenues                   |  |                                  | 951.2 |      |   | 634.6 |  |   | 625.8 |  
|Operating Expenses         |  |                                  | 686.2 |      |   | 513.7 |  |   | 543.2 |  
|                           |  |                                  |       |      |   |       |  |   |       |  
|Pre-Tax Operating Earnings |  | $                                | 265.0 |      | $ | 120.9 |  | $ | 82.6  |  
|                           |  |                                  |       |      |   |       |  |   |       |  

---

Totals may not add due to rounding



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##### Table of Contents

Consolidated revenues in 2006 increased $316.6 million, or 50% from 2005, while consolidated Operating
Expenses increased $172.5 million or 34% from 2005. Overall, Consolidated Pre-Tax Operating Earnings increased $144.1 million, or 119% from 2005.



The changes in our Pre-Tax Operating Earnings by segment from 2005 to 2006 are summarized as follows:



| |  |  | Asset ManagementOur 2006 Pre-Tax Operating Earnings from Asset Management were up $48.3 million, or 182% from 2005, primarily due to higher incentive
fees as a result of increased fund returns and higher assets under management.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Global MarketsOur 2006 Pre-Tax Operating Earnings from Global Markets were up $113.7 million or 252% from 2005, primarily due to the expansion of our
electronic trading effort and automated execution of most of our broker-dealer order flow, increased revenue capture and volumes, and improved market conditions.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | CorporateThe results from our Corporate segment were positively impacted in 2006 by realized gains from the sales of our corporate equity investment in
the International Securities Exchange, Inc. (ISE), as well as higher returns on our corporate investment in the Deephaven Funds. The decrease in our 2006 Pre-Tax Operating Earnings compared to 2005 is primarily related to the sale of our
investment in the Nasdaq Stock Market, Inc. (Nasdaq) in 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A reconciliation of income (loss) from continuing operations before income taxes in accordance with GAAP (Pre-Tax GAAP Income) to Pre-Tax Operating Earnings and of total GAAP expenses to Operating Expenses
is included elsewhere in this section.



Certain Factors Affecting Results
of Operations



We have experienced, and expect to
continue to experience, significant fluctuations in operating results due to a variety of factors, including, but not limited to, introductions or enhancements to trade execution services by us or our competitors; the value of our securities
positions and our ability to manage the risks attendant thereto; the volume of our market-making activities; the dollar value of securities traded; volatility in the securities markets; our market share with institutional and broker-dealer clients;
the performance, amount of, and volatility in, the results of our quantitative market-making and program trading portfolios; the performance of our international operations; our ability to manage personnel, overhead and other expenses, including our
occupancy expenses under our office leases and expenses and charges related to our 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; the addition or loss of executive management and asset management, sales and trading and technology 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
pre-tax profit margins, market share and revenue capture in our Global Markets segment and increases in our fund returns and assets under management in our Asset Management segment. If demand for our services declines in either of our segments due
to any of the above factors, and we are unable to adjust our cost structure on a timely basis, our operating results and strategic objectives 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.



29



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##### Table of Contents

Trends



We believe that our continuing operations are impacted by the following trends that may affect our financial condition and results of operations.



| |  |  | Broker-dealer clients continue to focus on statistics measuring the quality of equity executions (including speed of executions 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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Retail equity transaction volumes executed by broker-dealers have fluctuated over the past few years due to investor sentiment, market conditions and a variety of
other factors. Retail 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, many broker-dealers are offering their own internal crossing networks creating 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, and may continue to fall in the future.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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, institutional equity commissions were primarily allocated to broker-dealers in exchange for either research or soft
dollar and commission recapture programs.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There has been increased scrutiny of market-makers, specialists, hedge funds and soft dollar practices by the regulatory and legislative authorities. New
legislation or modifications to existing regulations and rules could occur in the future.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | There has been a proliferation of alternative investment entities, which has had the effect of materially increasing competition for new investor assets.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------



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. 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 Direct Trading, Direct Edge, Hotspot and ValuBond and the growth of our soft dollar and
commission recapture activity.



30



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##### Table of Contents

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, volatility in the marketplace, our mix of broker-dealer and institutional clients, and 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 annual management fees, calculated as fixed percentages of assets under management, and incentive fees, generally calculated as a percentage of the funds and managed accounts
year-to-date profits, if any.



We earn 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 income
and other primarily represents income earned, net of losses, related to our corporate investment in the Deephaven Funds and our strategic investments. Such income is primarily affected by the level of our corporate investments in our Deephaven Funds
and rates of return earned by the Deephaven Funds as well as the performance and activity of our strategic investments.



Transaction-based expenses



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



Execution and clearance fees primarily represent clearance fees paid to clearing brokers for 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 New York Stock Exchange (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, clearance fees charged by clearing brokers and fees paid to ECNs, exchanges and certain regulatory bodies.



Soft dollar and commission recapture expense represent payments to
institutions in connection with our soft dollar and commission recapture programs. Soft dollar and commission recapture expense fluctuates based on U.S. equity share volume executed on behalf of institutions.



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 our ECN, Direct Edge. 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, Professional fees, Depreciation and amortization and Occupancy and equipment rentals.



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



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##### Table of Contents

and incentive compensation paid to all other employees based on our profitability. Compensation for employees engaged in sales activities is determined
primarily based on a percentage of their gross revenues net of certain transaction-based expenses. The majority of compensation in Asset Management is determined by formulas based upon the profitability of the Asset Management segment, subject to
certain minimum guaranteed payments. Employee compensation and benefits expense fluctuates, for the most part, based on changes in our revenues, profitability and the number of employees.



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



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, |  
|                                                             |  | 2006                            |   |  | 2005  |   |  | 2004  |  
|Revenues                                                     |  |                                 |   |  |       |   |  |       |  
|Commissions and fees                                         |  | 42.6                            | % |  | 46.7  | % |  | 44.1  | %
|Net trading revenue                                          |  | 25.6                            | % |  | 26.1  | % |  | 40.1  | %
|Asset management fees                                        |  | 22.5                            | % |  | 14.1  | % |  | 12.4  | %
|Interest and dividends, net                                  |  | 1.7                             | % |  | 1.4   | % |  | 0.8   | %
|Investment income and other                                  |  | 7.6                             | % |  | 11.7  | % |  | 2.6   | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Total revenues                                               |  | 100.0                           | % |  | 100.0 | % |  | 100.0 | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Transaction-based expenses                                   |  |                                 |   |  |       |   |  |       |  
|Execution and clearance fees                                 |  | 11.2                            | % |  | 15.7  | % |  | 17.9  | %
|Soft dollar and commission recapture expense                 |  | 6.9                             | % |  | 10.0  | % |  | 9.6   | %
|Payments for order flow and ECN rebates                      |  | 4.4                             | % |  | 3.3   | % |  | 5.9   | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Total transaction-based expenses                             |  | 22.6                            | % |  | 29.0  | % |  | 33.3  | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Revenues, net of transaction-based expenses                  |  | 77.4                            | % |  | 71.0  | % |  | 66.7  | %
|                                                             |  |                                 |  
|Other direct expenses                                        |  |                                 |   |  |       |   |  |       |  
|Employee compensation and benefits                           |  | 37.0                            | % |  | 36.2  | % |  | 39.1  | %
|Communications and data processing                           |  | 3.5                             | % |  | 5.1   | % |  | 4.6   | %
|Depreciation and amortization                                |  | 2.2                             | % |  | 2.6   | % |  | 2.3   | %
|Professional fees                                            |  | 2.2                             | % |  | 3.1   | % |  | 2.4   | %
|Business development                                         |  | 1.5                             | % |  | 1.0   | % |  | 1.3   | %
|Occupancy and equipment rentals                              |  | 1.4                             | % |  | 2.1   | % |  | 2.7   | %
|Writedown of assets and lease loss accrual                   |  | 0.9                             | % |  | 1.6   | % |  | 0.6   | %
|Regulatory charges and related matters                       |  | 0.0                             | % |  | 0.9   | % |  | 12.7  | %
|Other                                                        |  | 1.8                             | % |  | 1.8   | % |  | 1.1   | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Total other direct expenses                                  |  | 50.5                            | % |  | 54.4  | % |  | 66.8  | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Income (loss) from continuing operations before income taxes |  | 27.0                            | % |  | 16.6  | % |  | 0.1  | %
|Income tax expense                                           |  | 10.3                            | % |  | 6.1   | % |  | 1.5   | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Net income (loss) from continuing operations                 |  | 16.6                            | % |  | 10.5  | % |  | 1.6  | %
|Income (loss) from discontinued operations, net of tax       |  | 0.0                             | % |  | 0.0   | % |  | 16.1  | %
|                                                             |  |                                 |   |  |       |   |  |       |  
|Net income                                                   |  | 16.6                            | % |  | 10.5  | % |  | 14.6  | %
|                                                             |  |                                 |   |  |       |   |  |       |  

---

Percentages may not add due to rounding.



32



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##### Table of Contents

Years Ended December 31, 2006 and 2005



Continuing Operations



Revenues



Asset Management



|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|--------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ------ |  | - | ----------- | - |  | ----- | -
|                                                                |  | For the years ended December 31, |         |   |      |   |         |        | 
|                                                                |  | 2006                             |         |   | 2005 |   |         | Change |  |   | % of Change |  
|Total Revenues from Asset Management (millions)                 |  | $                                | 214.9   |   |      | $ | 89.8    |        |  | $ | 125.1       |   |  | 139.3 | %
|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |       |  
|Average month-end balance of assets under management (millions) |  | $                                | 3,420.4 |   |      | $ | 3,291.1 |        |  | $ | 129.3       |   |  | 3.9   | %
|Annual fund return to investors*                                |  |                                  | 22.8    | % |      |   | 7.2     | %      |  |   | 15.6        | % |  | 218.4 | %

---

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



Total revenues from the Asset Management segment, which primarily consists of Asset management fees, increased 139.3% to
$214.9 million in 2006, from $89.8 million in 2005. The increase is primarily due to higher incentive fees as a result of increased fund returns and higher assets under management. The average month-end balance of assets under management increased
to $3.4 billion in 2006, from $3.3 billion in 2005. The blended annual fund return across all assets under management for 2006 was a gain of 22.8%, up from a gain of 7.2% in 2005.



Global Markets



|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|----------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | ----------- | - |  | ----- | -
|                                                                  |  | For the years ended December 31, |         |      |   |         |  |  
|                                                                  |  | 2006                             |         | 2005 |   | Change  |  |   | % of Change |  
|Commissions and fees (millions)                                   |  | $                                | 405.3   |      | $ | 296.2   |  | $ | 109.1       |   |  | 36.8  | %
|Net trading revenue (millions)                                    |  |                                  | 243.8   |      |   | 165.6   |  |   | 78.1        |   |  | 47.2  | %
|Interest and dividends, net (millions)                            |  |                                  | 12.2    |      |   | 6.6     |  |   | 5.5         |   |  | 83.6  | %
|Investment income and other (millions)                            |  |                                  | 8.4     |      |   | 2.2     |  |   | 6.2         |   |  | 283.2 | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|Total Revenues from Global Markets (millions)                     |  | $                                | 669.7   |      | $ | 470.7   |  | $ | 199.0       |   |  | 42.3  | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |       |  
|U.S equity dollar value traded ($ billions)                       |  |                                  | 2,033.6 |      |   | 1,882.2 |  |   | 151.4       |   |  | 8.0   | %
|U.S. equity trades executed (millions)                            |  |                                  | 225.5   |      |   | 204.1   |  |   | 21.4        |   |  | 10.5  | %
|Nasdaq and Listed equity shares traded (billions)                 |  |                                  | 94.3    |      |   | 106.3   |  |   | (12.0       | ) |  | 11.3 | %
|OTC Bulletin Board and Pink Sheet shares traded (billions)        |  |                                  | 1,063.1 |      |   | 718.8   |  |   | 344.3       |   |  | 47.9  | %
|Average revenue capture per U.S. equity dollar value traded (bps) |  |                                  | 2.1     |      |   | 1.8     |  |   | 0.4         |   |  | 21.6  | %



Total revenues from
the Global Markets segment, which primarily comprises Commissions and fees and Net trading revenue from our domestic businesses, increased 42.3% to $669.7 million in 2006, from $470.7 million in 2005. Revenues in 2006 were positively impacted by
improved market conditions, higher dollar volumes, an increase in revenue capture per U.S. equity dollar value traded, the expansion of our electronic trading effort and the automation of executions of most of our broker-dealer order flow. Revenues
in 2006 were also positively impacted by the addition of Direct Trading, Direct Edge, Hotspot and ValuBond, which were acquired in June 2005, October 2005, April 2006 and October 2006, respectively. Excluding the impact of these
acquisitions, total revenues from Global Markets would have increased 26.6% to $563.2 million in 2006, from $444.9 million in 2005. Revenues were also positively impacted by new fees charged to clients in connection with certain transaction-based
regulatory costs incurred by the Company. These fees increased Commissions and fees by $19.2 million in 2006. Approximately $9.4 million of these fees related to client transaction activity in 2006 while the remaining $9.8 million related to client
transaction activity in 2005 and prior years.



33



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##### Table of Contents

Average revenue capture per U.S. equity dollar value traded was 2.1 basis points (bps) in
2006, up from 1.8 bps in 2005. 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 $434.6
million and $330.4 million in 2006 and 2005, respectively. Core Equity Revenues do not include revenues from KEMILs European institutional business, Donaldson, Direct Trading, Direct Edge, Hotspot and ValuBond.



Corporate



|                                                                       |  |                                  |       |      |   |        |  |   |             |   |  |       |  
|---------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ------ |  | - | ----------- | - |  | ----- | -
|                                                                       |  | For the years ended December 31, |       |      |   |        |  |  
|                                                                       |  | 2006                             |       | 2005 |   | Change |  |   | % of Change |  
|Total Revenues from Corporate (millions)                               |  | $                                | 66.6  |      | $ | 74.2   |  | $ | (7.5        | ) |  | 10.1 | %
|                                                                       |  |                                  |       |      |   |        |  |   |             |   |  |       |  
|Average corporate investment balance in the Deephaven Funds (millions) |  | $                                | 230.2 |      | $ | 272.6  |  | $ | (42.5       | ) |  | 15.6 | %



Total revenues from
the Corporate segment, which primarily represents income from our corporate investments in the Deephaven Funds and other strategic investments, decreased 10.1% to $66.6 million, from $74.2 million in 2005. Included in 2006 is a pre-tax gain of $30.1
million related to the sale of the remaining portion of the Companys equity investment in the ISE. In 2005, the Company sold 70% of its original equity ownership of the ISE and its entire Nasdaq equity investment which resulted in pre-tax
gains of $34.2 million and $21.7 million, respectively. Excluding these gains on our strategic investments, total revenues from the Corporate segment were $36.5 million in 2006, up 99.9% from $18.3 million in 2005. Income from our corporate
investments in the Deephaven Funds rose 109.4% to $34.2 million in 2006 from $16.3 million in 2005. This increase was due to a higher average return on investment, offset in part by a lower average investment balance.



Transaction-based expenses



Execution and clearance fees increased 7.5% to $106.9 million in 2006, from
$99.4 million in 2005. As a percentage of total revenue, Execution and clearance fees decreased to 11.2% in 2006, from 15.7% in 2005. Excluding gains on the sales of our strategic investments, Execution and clearance fees as a percentage of total
revenue were 11.6% in 2006 and 17.2% in 2005. Execution and clearance fees fluctuate based on changes in transaction volumes, regulatory fees and efficiencies in processing the transactions.



Soft dollar and commission recapture expense increased 2.8% to $65.5 million
in 2006, from $63.7 million in 2005, primarily due to the inclusion of a full years results from Direct Trading in 2006, which was acquired in the middle of 2005.



Payments for order flow and ECN rebates increased to $42.2 million in 2006, from $21.2 million in 2005. As a percentage of
total revenue, Payments for order flow and ECN rebates increased to 4.4% in 2006, from 3.3% in 2005. This expense increased primarily due to increased profitability-based rebates paid to broker-dealers and the full year inclusion of, and higher
volumes within, the Direct Edge business which was acquired in October 2005.



Other direct expenses



Employee compensation and benefits expense increased 53.6% to $352.4 million in 2006, from $229.5 million in 2005. The increase was primarily due to stronger overall results, which led to higher profitability-based compensation, as well as
additional compensation related to Direct Trading, Direct Edge, Hotspot and ValuBond. As a percentage of total revenue, Employee compensation and benefits increased slightly to 37.0% in 2006 from 36.2% in 2005. Excluding gains from the sales of our
ISE and Nasdaq investments, Employee



34



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##### Table of Contents

compensation and benefits as a percentage of total revenues decreased slightly to 38.3% in 2006 from 39.6% in 2005. The number of full time employees in our
continuing operations increased to 844 employees at December 31, 2006, from 720 employees at December 31, 2005, primarily due to the acquisitions of Hotspot and ValuBond.



Communications and data processing expense increased 1.9% to $33.1 million in 2006, from $32.5 million in 2005, due to
technology costs incurred relating to our new businesses within Global Markets segment in 2005 and 2006. Depreciation and amortization expense increased 26.2% to $20.6 million in 2006, from $16.4 million in 2005, due to the purchase or acquisition
of fixed assets and the amortization of intangible assets in connection with our acquisitions. Occupancy and equipment rentals expense decreased slightly to $13.5 million in 2006, from $13.6 million in 2005.



Professional fees increased 5.2% to $20.6 million in 2006, from $19.6 million
in 2005. The increase in 2006 was primarily due to increases in legal expenses, which fluctuate based on the activity relating to various legal and regulatory proceedings, and consulting expenses.



Business development expense increased to $14.3 million in 2006, compared to
$6.4 million in 2005. The primary reason for the increase was higher expenses related to the corporate brand campaign, marketing and travel and entertainment costs.



Other expenses increased to $17.1 million in 2006, compared to $11.5 million in 2005. Other expenses in 2006 include a 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. Additionally,
employee recruitment costs increased to $3.4 million in 2006, compared to $1.5 million in 2005.



During 2006, the Company incurred charges of $8.5 million in writedowns of assets and lease loss accruals primarily relating to costs associated with
excess real estate capacity in Jersey City, N.J. During 2005, the Company incurred charges of $15.8 million, consisting of $10.1 million of writedowns of assets and lease loss accruals primarily related to the costs associated with excess real
estate capacity in our Jersey City, N.J. facilities, and $5.7 million related to charges for regulatory and related matters.



Our effective tax rate for 2006 from continuing operations of 38% differed from the federal statutory rate of 35% primarily due to state income taxes and
non-deductible charges.



Years Ended December 31, 2005 and 2004



Continuing Operations



Revenues



Asset Management



|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |      |  
|--------------------------------------------------------------- |  | -------------------------------- | ------- | - | ---- | - | ------- | ------ |  | - | ----------- | - |  | ---- | -
|                                                                |  | For the years ended December 31, |         |   |      |   |         |        | 
|                                                                |  | 2005                             |         |   | 2004 |   |         | Change |  |   | % of Change |  
|Total Revenues from Asset Management (millions)                 |  | $                                | 89.8    |   |      | $ | 78.2    |        |  | $ | 11.6        |   |  | 14.9 | %
|                                                                |  |                                  |         |   |      |   |         |        |  |   |             |   |  |      |  
|Average month-end balance of assets under management (millions) |  | $                                | 3,291.1 |   |      | $ | 2,963.5 |        |  | $ | 327.7       |   |  | 11.1 | %
|Annual fund return to investors*                                |  |                                  | 7.2     | % |      |   | 6.5     | %      |  |   | 0.6         | % |  | 9.6  | %

---

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



Total revenues from the Asset Management segment, which primarily consists of Asset management fees, increased 14.9% to
$89.8 million in 2005, from $78.2 million in 2004. The increase is due to higher incentive fees as a result of an increase in fund returns as well as higher management fees due to the growth in the average



35



---

##### Table of Contents

month-end balance of assets under management. The average month-end balance of assets under management increased to $3.3 billion in 2005, from $3.0 billion
in 2004. The blended annual fund return across all assets under management for 2005 was 7.2%, up from 6.5% in 2004.



Global Markets



|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |        |  
|----------------------------------------------------------------- |  | -------------------------------- | ------- | ---- | - | ------- |  | - | ----------- | - |  | ------ | -
|                                                                  |  | For the years ended December 31, |         |      |   |         |  |  
|                                                                  |  | 2005                             |         | 2004 |   | Change  |  |   | % of Change |  
|Commissions and fees (millions)                                   |  | $                                | 296.2   |      | $ | 276.0   |  | $ | 20.2        |   |  | 7.3    | %
|Net trading revenue (millions)                                    |  |                                  | 165.6   |      |   | 251.0   |  |   | (85.4       | ) |  | 34.0  | %
|Interest and dividends, net (millions)                            |  |                                  | 6.6     |      |   | 3.8     |  |   | 2.8         |   |  | 74.1   | %
|Investment income and other (millions)                            |  |                                  | 2.2     |      |   | 0.2     |  |   | 2.0         |   |  | 1180.8 | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |        |  
|Total Revenues from Global Markets (millions)                     |  | $                                | 470.7   |      | $ | 531.0   |  | $ | (60.3       | ) |  | 11.4  | %
|                                                                  |  |                                  |         |      |   |         |  |   |             |   |  |        |  
|U.S equity dollar value traded ($ billions)                       |  |                                  | 1,882.2 |      |   | 1,730.7 |  |   | 151.5       |   |  | 8.8    | %
|U.S. equity trades executed (millions)                            |  |                                  | 204.1   |      |   | 205.9   |  |   | (1.8        | ) |  | 0.9   | %
|Nasdaq and Listed equity shares traded (billions)                 |  |                                  | 106.3   |      |   | 125.5   |  |   | (19.2       | ) |  | 15.3  | %
|OTC Bulletin Board and Pink Sheet shares traded (billions)        |  |                                  | 718.8   |      |   | 1,349.6 |  |   | (630.8      | ) |  | 46.7  | %
|Average revenue capture per U.S. equity dollar value traded (bps) |  |                                  | 1.8     |      |   | 2.5     |  |   | (0.7        | ) |  | 28.2  | %



Total revenues from
our Global Markets segment, which primarily comprises Commissions and fees and Net trading revenue from the domestic businesses, decreased 11.4% to $470.7 million in 2005, from $531.0 million in 2004. Revenues in 2005 were negatively impacted by
lower revenue capture per U.S. equity dollar value traded, offset by new revenues from Direct Trading and Direct Edge, which were acquired in June 2005 and October 2005, respectively, and higher dollar volumes. Our revenue capture was impacted
during 2005 by greater competition, regulatory changes and market conditions. Excluding the impact of Direct Trading and Direct Edge, total revenues from Global Markets would have decreased 16.2% to $444.9 million in 2005, from $531.0 million in
2004. In 2004, the Company recorded a reserve of $6.5 million against the amount the Company believes it is owed by a counterparty in a trading dispute (the Dispute Reserve). This reserve reduced net trading revenues by $6.5 million in
2004.



Average revenue capture per U.S. equity dollar value
traded was 1.8 bps in 2005, down 28.2% from 2.5 bps in 2004. We removed the impact of the Dispute Reserve of $6.5 million from our revenue capture calculation for 2004. Core Equity Revenues were $330.4 million and $424.7 million in 2005 and 2004,
respectively. As previously noted, Core Equity Revenues do not include revenues from KEMILs European institutional business, Donaldson, Direct Trading and Direct Edge.



Corporate



|                                                                       |  |                                  |       |      |   |        |  |             |      |  |       |  
|---------------------------------------------------------------------- |  | -------------------------------- | ----- | ---- | - | ------ |  | ----------- | ---- |  | ----- | -
|                                                                       |  | For the years ended December 31, |       |      |   |        | 
|                                                                       |  | 2005                             |       | 2004 |   | Change |  | % of Change |     
|Total Revenues from Corporate (millions)                               |  | $                                | 74.2  |      | $ | 16.6   |  | $           | 57.5 |  | 346.4 | %
|                                                                       |  |                                  |       |      |   |        |  |             |      |  |       |  
|Average corporate investment balance in the Deephaven Funds (millions) |  | $                                | 272.6 |      | $ | 216.9  |  | $           | 55.7 |  | 25.7  | %



Total revenues from
the Corporate segment, which primarily represents income from our corporate investments in the Deephaven Funds and other strategic investments, increased to $74.2 million. In 2005, the Company sold 70% of its original equity ownership of the ISE and
its entire Nasdaq equity investment which resulted in pre-tax gains of $34.2 million and $21.7 million, respectively. Excluding these gains on our strategic



36



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##### Table of Contents

investments, total revenues from the Corporate segment were $18.3 million in 2005, up 10% from 2004. Income from our corporate investments in the Deephaven
Funds rose 28.0% to $16.3 million in 2005 from $12.8 million in 2004. This increase was due to a higher average investment balance and higher average returns on such investment.



Transaction-based expenses



Execution and clearance fees decreased 11.1% to $99.4 million in 2005, from $111.8 million in 2004. As a percentage of total revenue, execution and
clearance fees decreased to 15.7% in 2005, from 17.9% in 2004. Execution and clearance fees were 17.2% of 2005 total revenues excluding gains on the sales of our strategic investments. Execution and clearance fees fluctuate based on changes in
transaction volumes, regulatory fees and efficiencies in processing the transactions.



Soft dollar and commission recapture expense increased 5.9% to $63.7 million in 2005, from $60.1 million in 2004, primarily due to the addition of the Direct Trading business in the middle of 2005.



Payments for order flow and ECN rebates decreased 42.1% to $21.2 million in
2005, from $36.6 million in 2004. As a percentage of total revenue, Payments for order flow and ECN rebates decreased to 3.3% in 2005, from 5.9% in 2004. The decrease on a dollar basis is primarily due to changes in our payment for order flow
policies initiated in the second quarter of 2005.



Other
direct expenses



Employee compensation and benefits
expense decreased 6.2% to $229.5 million in 2005, from $244.5 million in 2004. As a percentage of total revenue, employee compensation and benefits decreased to 36.2% in 2005 from 39.1% in 2004. Excluding gains from the sales of our ISE and Nasdaq
investments, Employee compensation and benefits as a percentage of total revenues increased slightly to 39.6% in 2005 from 39.1% in 2004. The number of full time employees in our continuing operations increased to 720 employees at December 31,
2005, from 683 employees at December 31, 2004, primarily due to the acquisitions of Direct Trading and Direct Edge.



Communications and data processing expense increased 12.5% to $32.5 million in 2005, from $28.9 million in 2004. This increase was attributable to
additional costs from Direct Trading and a general increase in technology and market data costs.



Depreciation and amortization expense increased 14.8% to $16.4 million in 2005, from $14.2 million in 2004. This increase was primarily due to purchases
of fixed assets and leasehold improvements at our new facility at 545 Washington Boulevard, Jersey City, N.J., as well as depreciation and amortization related to Direct Trading and Direct Edge. Occupancy and equipment rentals expense decreased
19.6% to $13.6 million in 2005, from $16.9 million in 2004, primarily due to lease loss accruals related to our Jersey City, N.J. office locations.



Professional fees increased 31.1% to $19.6 million in 2005, from $14.9 million in 2004. The increase in 2005 was primarily due to an increase in legal
expenses, which have fluctuated based on the activity relating to various legal and regulatory proceedings, and consulting expenses.



Business development expense decreased to $6.4 million in 2005, compared to $8.3 million in 2004. The primary reason for the decrease was lower travel and
entertainment costs.



Other expenses increased to $11.5 million
in 2005, compared to $6.8 million in 2004. Other expenses in 2004 included a benefit of approximately $3.0 million related to an adjustment to legal reserves established during 2003. Excluding the impact of this one-time adjustment in 2004, Other
expenses increased 17% due to costs associated with the move of our corporate headquarters, as well as higher general and administrative costs.



37



---

##### Table of Contents

During 2005, the Company incurred charges of $15.8 million, consisting of $10.1 million of writedowns of
assets and lease loss accruals primarily related to the costs associated with excess real estate capacity in our Jersey City, N.J. facilities, and $5.7 million related to charges for regulatory and related matters.



During 2004, the Company incurred charges of $83.2 million, consisting of
$79.3 million related to charges for regulatory and related matters and $3.8 million of writedowns of assets and lease loss accruals primarily related to the costs associated with excess real estate capacity in Jersey City, N.J. For a discussion of
the $79.3 million charge for regulatory and related matters, refer to Footnote 12 Regulatory Charges and Related Matters included in Part II, Item 8 Financial Statements and Supplementary Data of our 2005 Form 10-K.



Our effective tax rate for 2005 from continuing operations of
37% differed from the federal statutory rate of 35% primarily due to non-deductible penalties related to charges for regulatory and related matters and state income taxes.



Reconciliation of Total GAAP Expenses and Pre-Tax GAAP Income to Operating Expenses and Pre-Tax Operating Earnings, Respectively



In an effort to provide additional information
regarding the Companys results as determined by GAAP, the Company also discloses certain non-GAAP information which management believes provides useful information to investors. Within this Form 10-K, the Company has disclosed its Operating
Expenses and its Pre-Tax Operating Earnings to assist the reader in understanding the impact of Writedown of assets and lease loss accrual and Regulatory charges and related matters on the Companys annual results for 2006, 2005 and 2004 by
segment, thereby facilitating more useful period-to-period comparisons of the Companys continuing businesses. For additional information related to segments, see Footnote 20 Business Segments included in Part II, Item 8
Financial Statements and Supplementary Data included in this document. Charts are presented in millions.



Total GAAP Expenses to Operating Expenses



|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|------------------------------------------ |  | ------------------------------------ | ----- | - | -------------- | - | ----- | --------- |  | ----- | ---- |  | - | ----- | -
|                                           |  | For the year ended December 31, 2006 |      
|                                           |  | Asset Mgmt                           |       |   | Global Markets |   |       | Corporate |  | Total |     
|Transaction-based Expenses                 |  | $                                    |      |   |                | $ | 214.6 |           |  | $     |     |  | $ | 214.6 |  
|Other Direct Expenses                      |  |                                      | 140.0 |   |                |   | 304.8 |           |  |       | 35.3 |  |   | 480.1 |  
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|Total GAAP Expenses                        |  |                                      | 140.0 |   |                |   | 519.4 |           |  |       | 35.3 |  |   | 694.7 |  
|Writedown of assets and lease loss accrual |  |                                      |      |   |                |   | (8.5  | )         |  |       |     |  |   | (8.5  | )
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|Operating Expenses                         |  | $                                    | 140.0 |   |                | $ | 510.9 |           |  | $     | 35.3 |  | $ | 686.2 |  
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|                                           | 
|                                           |  | For the year ended December 31, 2005 |      
|                                           |  | Asset Mgmt                           |       |   | Global Markets |   |       | Corporate |  | Total |     
|Transaction-based Expenses                 |  | $                                    |      |   |                | $ | 184.3 |           |  | $     |     |  | $ | 184.3 |  
|Other Direct Expenses                      |  |                                      | 69.0  |   |                |   | 251.3 |           |  |       | 24.9 |  |   | 345.2 |  
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|Total GAAP Expenses                        |  |                                      | 69.0  |   |                |   | 435.6 |           |  |       | 24.9 |  |   | 529.5 |  
|Writedown of assets and lease loss accrual |  |                                      |      |   |                |   | (10.0 | )         |  |       |     |  |   | (10.0 | )
|Regulatory charges and related matters     |  |                                      | (5.7  | ) |                |   |      |           |  |       |     |  |   | (5.7  | )
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|Operating Expenses                         |  | $                                    | 63.2  |   |                | $ | 425.6 |           |  | $     | 24.9 |  | $ | 513.7 |  
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|                                           | 
|                                           |  | For the year ended December 31, 2004 |      
|                                           |  | Asset Mgmt                           |       |   | Global Markets |   |       | Corporate |  | Total |     
|Transaction-based Expenses                 |  | $                                    |      |   |                | $ | 208.5 |           |  | $     |     |  | $ | 208.5 |  
|Other Direct Expenses                      |  |                                      | 48.6  |   |                |   | 335.7 |           |  |       | 33.5 |  |   | 417.7 |  
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|Total GAAP Expenses                        |  |                                      | 48.6  |   |                |   | 544.2 |           |  |       | 33.5 |  |   | 626.3 |  
|Writedown of assets and lease loss accrual |  |                                      |      |   |                |   | (3.8  | )         |  |       |     |  |   | (3.8  | )
|Regulatory charges and related matters     |  |                                      |      |   |                |   | (79.3 | )         |  |       |     |  |   | (79.3 | )
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  
|Operating Expenses                         |  | $                                    | 48.6  |   |                | $ | 461.1 |           |  | $     | 33.5 |  | $ | 543.2 |  
|                                           |  |                                      |       |   |                |   |       |           |  |       |      |  |   |       |  



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Pre-Tax GAAP Income to Pre-Tax Operating Earnings



|                                           |  |                                      |      |                |   |       |           |  |   |       |   |  |   |       |  
|------------------------------------------ |  | ------------------------------------ | ---- | -------------- | - | ----- | --------- |  | - | ----- | - |  | - | ----- | -
|                                           |  | For the year ended December 31, 2006 |     
|                                           |  | Asset Mgmt                           |      | Global Markets |   |       | Corporate |  |   | Total |  
|Pre-Tax GAAP Income                        |  | $                                    | 74.8 |                | $ | 150.3 |           |  | $ | 31.4  |   |  | $ | 256.5 |  
|Writedown of assets and lease loss accrual |  |                                      |     |                |   | 8.5   |           |  |   |      |   |  |   | 8.5   |  
|                                           |  |                                      |      |                |   |       |           |  |   |       |   |  |   |       |  
|Pre-Tax Operating Earnings                 |  | $                                    | 74.8 |                | $ | 158.8 |           |  | $ | 31.4  |   |  | $ | 265.0 |  
|                                           |  |                                      |      |                |   |       |           |  |   |       |   |  |   |       |  
|                                           | 
|                                           |  | For the year ended December 31, 2005 |     
|                                           |  | Asset Mgmt                           |      | Global Markets |   |       | Corporate |  |   | Total |  
|Pre-Tax GAAP Income                        |  | $                                    | 20.8 |                | $ | 35.1  |           |  | $ | 49.3  |   |  | $ | 105.2 |  
|Writedown of assets and lease loss accrual |  |                                      |     |                |   | 10.0  |           |  |   |      |   |  |   | 10.0  |  
|Regulatory charges and related matters     |  |                                      | 5.7  |                |   |      |           |  |   |      |   |  |   | 5.7   |  
|                                           |  |                                      |      |                |   |       |           |  |   |       |   |  |   |       |  
|Pre-Tax Operating Earnings                 |  | $                                    | 26.5 |                | $ | 45.1  |           |  | $ | 49.3  |   |  | $ | 120.9 |  
|                                           |  |                                      |      |                |   |       |           |  |   |       |   |  |   |       |  
|                                           | 
|                                           |  | For the year ended December 31, 2004 |     
|                                           |  | Asset Mgmt                           |      | Global Markets |   |       | Corporate |  |   | Total |  
|Pre-Tax GAAP Income                        |  | $                                    | 29.6 |                | $ | (13.2 | )         |  | $ | (16.9 | ) |  | $ | (0.5  | )
|Writedown of assets and lease loss accrual |  |                                      |     |                |   | 3.8   |           |  |   |      |   |  |   | 3.8   |  
|Regulatory charges and related matters     |  |                                      |     |                |   | 79.3  |           |  |   |      |   |  |   | 79.3  |  
|                                           |  |                                      |      |                |   |       |           |  |   |       |   |  |   |       |  
|Pre-Tax Operating Earnings                 |  | $                                    | 29.6 |                | $ | 69.9  |           |  | $ | (16.9 | ) |  | $ | 82.6  |  
|                                           |  |                                      |      |                |   |       |           |  |   |       |   |  |   |       |  



Liquidity and Capital Resources



Historically, we have financed our business primarily
through cash generated by operations, as well as the proceeds from our stock issuances and, in 2004, from the proceeds of the sale of our Derivative Markets segment. As of December 31, 2006, we had $2.0 billion in assets related to our
continuing operations, 70% of which consisted of cash or assets readily convertible into cash, principally receivables from brokers and dealers, asset management fees receivable and securities owned. Asset management fees receivable includes
incentive and management fees earned for sponsoring and managing the Deephaven Funds. 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 and AMEX markets. At December 31, 2006, the Company had net current assets, which consists of net assets readily convertible into cash, of approximately $345.9 million. Our corporate investment in the Deephaven Funds was $187.6
million at December 31, 2006. The majority of this investment can be liquidated upon request to Deephaven subject to a ninety-day written notification period and monthly redemption limits.



The Company has previously disclosed its intent to pursue selective
acquisitions of (or possible joint ventures with) complementary businesses primarily in the markets in which our Global Markets and Asset Management segments operate. 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.



In June 2005, the Company acquired, for cash, the business of Direct Trading Institutional, Inc. (now operating as Direct Trading). In October 2005, the Company acquired, for cash, the business of the ATTAIN ECN. This
business currently operates under the name Direct Edge. In 2006, the Company paid $15.5 million relating to contingent payment obligations incurred in the acquisition of these two businesses. The acquisition of the business of Direct Trading
contains an additional contingent payment due in the third quarter of 2007 based



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on the profitability of that business during the second year of operation post-acquisition and the acquisition of Direct Edge contains three additional
annual contingent payments based on meeting certain revenue and client retention metrics. In April 2006, the Company acquired Hotspot for $77.5 million in cash. In October 2006, the Company acquired ValuBond for $18.2 million in cash. No assurance
can be given with respect to the business effect of these transactions or the timing, likelihood or business effect of any other possible transactions.



As discussed elsewhere in this document, we sold our Derivative Markets business for approximately $237 million in cash in December 2004. The final
purchase price was subject to adjustment based on the final determination of the book value of the Derivative Markets business at the time the deal closed. In 2005, the result of this adjustment and other expenses related to the sale resulted in a
gain of $122,000, net of tax.



Income (loss) from continuing
operations before income taxes was $256.5 million, $105.2 million and ($514,000) for 2006, 2005 and 2004, respectively. Included in these amounts were certain non-cash expenses such as depreciation and amortization and certain non-cash writedowns.
Depreciation expense from continuing operations was $15.8 million, $14.6 million, and $13.6 million in 2006, 2005 and 2004, respectively. Amortization expense from continuing operations, which related to intangible assets, was $4.8 million, $1.8
million and $605,000 during 2006, 2005 and 2004, respectively. Non-cash writedowns from continuing operations were $200,000, $800,000 and $1.2 million during 2006, 2005 and 2004, respectively, primarily related to costs associated with fixed assets
no longer actively being used and impaired strategic investments.



Capital expenditures related to our continuing operations were $13.0 million, $25.7 million and $40.2 million during 2006, 2005 and 2004, respectively. Purchases of strategic investments were $38.8 million, $3.7 million and $8.9 million and
proceeds from sale of strategic investments were $33.1 million, $74.0 million and $0 during 2006, 2005 and 2004, respectively. Acquisitions of businesses, net of cash acquired, were $95.8 million, $45.1 million and $2.5 million during 2006, 2005 and
2004, 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 in the Deephaven Funds
decreased by $94.1 million during 2006, but increased by $66.3 million and $17.7 million during 2005 and 2004, respectively. The change in the balance of our corporate investment in the Deephaven Funds in 2006 primarily relates to net redemptions of
$128.3 million offset in part, by positive returns on our investments of $34.2 million.



At its April 18, 2006 meeting, the Board of Directors authorized an increase in the size of the Companys stock repurchase program from $345 million to $495 million. The Company repurchased 4.1 million
shares under the stock repurchase program during 2006 for $71.0 million. Through December 31, 2006, the Company had repurchased 41.7 million shares for $366.9 million under its stock repurchase program. The Company may repurchase shares in
the open market or through privately negotiated transactions, depending on prevailing market conditions, alternative uses of capital and other factors. The Company cautions that there are no assurances that any further repurchases may
actually occur. The Company had approximately 103.7 million shares of Class A Common Stock outstanding as of December 31, 2006.



Our U.S. registered broker-dealers are subject to regulatory requirements intended to ensure the general financial soundness and liquidity of
broker-dealers and requiring 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 NASD 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. Our foreign registered broker-dealers and our FCM are subject to
capital adequacy requirements of their respective regulatory authorities. As of December 31,



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2006, all of our broker-dealers were in compliance with the regulatory rules. The following table sets forth the net capital levels and requirements for the
following significant regulated broker-dealer subsidiaries at December 31, 2006, as filed in their respective regulatory filings (in millions):



|               |  |             |      |                        |   |                    |  |   |     
|-------------- |  | ----------- | ---- | ---------------------- | - | ------------------ |  | - | ----
|Entity         |  | Net Capital |      | Net CapitalRequirement |   | Excess Net Capital
|KEM            |  | $           | 80.4 |                        | $ | 7.0                |  | $ | 73.4
|KCM            |  |             | 51.4 |                        |   | 1.0                |  |   | 50.4
|KEMIL          |  |             | 22.1 |                        |   | 8.0                |  |   | 14.1
|Direct Trading |  |             | 11.0 |                        |   | 0.4                |  |   | 10.6



We have no long-term
debt at December 31, 2006 nor do we have any material long-term debt commitments for 2007. We anticipate that available cash resources and credit facilities will be sufficient to meet our anticipated working capital and capital expenditure
requirements for at least the next 12 months.



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 and guaranteed employment contracts longer than one year as of December 31, 2006
are summarized below (in millions):



|                             |  |                  |      |           |   |           |  |                                    |      |       |   |       |  |   |      
|---------------------------- |  | ---------------- | ---- | --------- | - | --------- |  | ---------------------------------- | ---- | ----- | - | ----- |  | - | -----
|                             |  | Payments due in:
|                             |  | 2007             |      | 2008-2009 |   | 2010-2011 |  | Thereafter throughOctober 31, 2021 |      | Total
|Operating lease obligations1 |  | $                | 11.3 |           | $ | 20.9      |  | $                                  | 20.0 |       | $ | 101.1 |  | $ | 153.3
|Other obligations1           |  |                  | 30.4 |           |   | 40.3      |  |                                    |     |       |   |      |  |   | 70.6 
|                             |  |                  |      |           |   |           |  |                                    |      |       |   |       |  |   |      
|Total                        |  | $                | 41.6 |           | $ | 61.2      |  | $                                  | 20.0 |       | $ | 101.1 |  | $ | 223.9
|                             |  |                  |      |           |   |           |  |                                    |      |       |   |       |  |   |      

---

1-  See Footnote 11 to the Consolidated Financial Statements



Off-Balance Sheet Arrangements



As of December 31, 2006, 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 for approximately $237.0
million in cash, subject to an adjustment based on the final determination of the book value of the Derivative Markets business at the time the deal closed. The result of this adjustment and other expenses related to the sale resulted in income of
$122,000, net of tax, during 2005. The decision to sell the Derivative Markets segment was based on a review of



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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. The net income included in our Income from discontinued operations, net of tax, on the Consolidated Statements of Operations, excluding the gain on the sale in 2004 of $80.0 million, was approximately $122,000 and $21.0 million
for the years ended 2005 and 2004, respectively.



Critical Accounting
Policies



The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions. We believe that, of our significant accounting policies, the following policies involve a higher degree of judgment.



Lease Loss AccrualIt is the Companys 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, the Companys policy is to accrue future costs
related to excess capacity using a discounted cash flow analysis.



The Company incurred $8.5 million of Writedown of assets and lease loss accruals in 2006. A loss of $8.0 million is 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 is unoccupied. The Company engaged a real estate broker to sub-lease this excess space, but to date our efforts to sub-let this space have not been successful. This accrual was derived from assumptions
and estimates based on lease terms of an anticipated sub-lease agreement, which assumed a sub-lease would commence in the beginning of 2008, 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.



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 $133.0 million as of December 31, 2006 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,
Direct Trading, Direct Edge, Hotspot and ValuBond. We performed our annual test for impairment of goodwill in the second quarter of 2006 and determined that goodwill was not impaired during 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.
Furthermore, the Company believes there was no impairment of the goodwill balance at December 31, 2006.



Intangible assets, less accumulated amortization, of $63.7 million as of December 31, 2006 are all attributable to our Global Markets segment.
Substantially all intangible assets resulted from the purchases of the businesses of Donaldson, which represents $10.2 million of the balance, Direct Trading, which represents $16.5 million of the balance, and Hotspot, which represents $33.3 million
of the balance. These assets, which primarily consist of customer relationships, are being amortized on a straight-line basis over their useful lives, which have been determined to range from two to thirty years. We performed our annual test for
impairment of intangible assets in the second quarter of 2006 and determined that intangible assets were not impaired during that time. Furthermore, the Company believes there was no impairment of these intangible assets at December 31, 2006.



Strategic InvestmentsStrategic investments
include non-controlling equity ownership interests in financial services-related businesses and are accounted for under the equity method at cost or at fair value. The equity



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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 fair value of investments recorded in the Companys broker-dealer subsidiaries, for which a quoted market or dealer price is
not available for the size of the Companys investment, is based on managements estimate. Among the factors considered by management in determining the fair value of investments are the cost of the investment, terms and liquidity,
developments since the acquisition of the investment, the sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business
potential of the issuer, the quoted market price of securities with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. The fair value of these investments is subject to a high
degree of volatility and may be susceptible to significant fluctuations in the near term.



Investments classified as available-for-sale are reported at fair value with unrealized gains and losses excluded from earnings and reported in Accumulated other comprehensive income, net of tax within
Stockholders equity on the Consolidated Statements of Financial Condition.



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 impairment value.



Market-Making ActivitiesSecurities owned and securities sold, not yet purchased, which primarily consist of listed and OTC stocks, are
carried at market value and are recorded on a trade date basis. Market value is estimated daily using market quotations available from major securities exchanges and dealers.



Asset Management FeesDeephaven earns asset management fees for sponsoring and managing the Deephaven Funds.
These fees are recorded monthly as earned and are calculated as a percentage of each Deephaven Funds monthly net assets, plus a percentage of a new high net asset value (the Incentive Allocation Fee), as defined in the applicable
private placement offering memorandum, for any six month period ended June 30th or December 31st. A new high net asset value is defined as the amount by which the net asset value of the particular Deephaven fund exceeds the greater of
either the highest previous net asset value in that Deephaven fund or the net asset value at the time each investor in that fund made a purchase. The Incentive Allocation Fee may increase or decrease during the year based on the performance of the
Deephaven Funds and the level of assets under management.



Writedown of Fixed AssetsWritedowns of fixed assets are recognized when it is determined that the fixed assets are impaired. The amount of the impairment is determined by the difference between the carrying amount and the
estimated fair value of the fixed asset. In determining the impairment, an estimated fair value is obtained through research and inquiry of the market. Fixed assets are reviewed for impairment on a periodic basis.



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 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 the Companys common stock. Forfeiture rates are estimated based on historical rates of forfeiture of
employee stock awards.



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A portion of our Employee compensation and benefits expense on the Consolidated Statements of Operations
represents discretionary bonuses, which are accrued for throughout the year and paid after the end of the year. Among many factors, discretionary bonus accruals are generally influenced by the Companys 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 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 July 2006, the FASB issued FASB Interpretation No. 48
Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109(FIN 48), which clarifies the way companies account for uncertainty in income taxes. FIN 48 provides guidance related to a
recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken, or expected to be taken on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. We
do not expect the adoption of FIN 48 to have a material impact on our consolidated financial statements.



In September 2006, the FASB issued SFAS No. 157 Fair Value Measurements (SFAS No. 157), which defines fair value, establishes
a framework for measuring fair value and expands disclosures about fair value measurements. SFAS No. 157 is effective for the Company beginning as of January 1, 2008. We are evaluating the potential impact of adopting SFAS No. 157.



In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108 Considering the Effects of Prior Year Misstatements When Quantifying Misstatements in Current Year Financial Statements (SAB 108), which provides guidance on quantifying and evaluating the materiality of
unrecorded prior year misstatements. The SEC staff indicates that the Company should quantify the impact of correcting all misstatements, including both the carryover and reversing effects of prior year misstatements, on the current year financial
statements. Companies may choose to restate their financial statements for any material misstatements arising from the application of SAB 108 or recognize a cumulative effect adjustment within the current year opening balance in retained earnings,
with disclosure of such items. SAB 108 is effective for fiscal years ending after November 15, 2006. SAB 108 did not have an impact on our consolidated financial statements as of December 31, 2006.



Item 7A.Quantitative and Qualitative Disclosures About Market Risk



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, commercial paper 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



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Statements of Financial Condition. These other amounts 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 transactions are
monitored by senior management on a real-time basis as are individual and aggregate dollar and inventory position totals and real-time profits and losses. The management of trading positions is enhanced by review of mark-to-market valuations and
position summaries on a daily basis.



In the normal course of
our equities market-making business, we maintain inventories of exchange-listed and OTC equity securities. The fair value of these securities at December 31, 2006 and 2005 was $703.0 million and $372.0 million, respectively, in long positions
and $693.1 million and $345.5 million, respectively, in short positions. The potential change in fair value, using a hypothetical 10% decline in prices, is estimated to be a $992,000 loss and a $2.7 million loss as of December 31, 2006 and
2005, 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).



|                  |  |                                    |         |                              |   |                                    |  |                              |       |                                    |   |                              |  |   |       |  |   |     
|----------------- |  | ---------------------------------- | ------- | ---------------------------- | - | ---------------------------------- |  | ---------------------------- | ----- | ---------------------------------- | - | ---------------------------- |  | - | ----- |  | - | ----
|                  |  | 2006                               |         | 2005                         |   | 2004                              
|                  |  | Aggregate ofLong andShortPositions |         | Net ofLong andShortPositions |   | Aggregate ofLong andShortPositions |  | Net ofLong andShortPositions |       | Aggregate ofLong andShortPositions |   | Net ofLong andShortPositions
|Average month-end |  | $                                  | 1,157.2 |                              | $ | 30.5                               |  | $                            | 700.3 |                                    | $ | 32.6                         |  | $ | 525.8 |  | $ | 27.9
|Highest month-end |  |                                    | 1,564.4 |                              |   | 51.4                               |  |                              | 874.8 |                                    |   | 46.2                         |  |   | 627.5 |  |   | 74.5
|Lowest month-end  |  |                                    | 903.9   |                              |   | 7.8                                |  |                              | 496.9 |                                    |   | 10.6                         |  |   | 411.4 |  |   | 1.2 



As of
December 31, 2006, we had a $187.6 million corporate investment in the Deephaven Funds, $144.3 million of which was invested in the Market Neutral Fund. As of December 31, 2006, approximately 38% of the Deephaven Funds assets under
management were in the Deephaven Market Neutral Fund. The investment philosophy for the Market Neutral 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 Market Neutral 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. Its returns are primarily dependent
upon equity trading volumes, equity volatility, mergers and acquisitions and secondary offering activity in the capital markets, and credit spread relationships, among other factors. Within the Market Neutral Fund, Deephaven generally employs a
variety of investment strategies, including event-driven, volatility-driven, fundamental equity, credit-driven and global macro strategies among others. There is no material limitation on the types of investment strategies that may be employed by
the Market Neutral Fund.



There will be unhedged asset factor
risks (i.e. equity, credit, interest rate, foreign exchange) in the Market Neutral 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 that the prime



45



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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 counter-parties could fail, which would likely have the effect of greatly diminishing the value of the assets which are the
subject of trades with that 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 its risk control or its 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. The Company incurs operational risk across all of its 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. The Company has also established policies, procedures and technologies to protect its 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. The Company is generally subject to extensive regulation in the different jurisdictions in which it conducts its business (see
Government Regulation and Market Structure in Part I, Item 1). The Company has established procedures based on legal and regulatory requirements that are designed to foster compliance with applicable statutory and regulatory
requirements. The Company also has established procedures that are designed to require that the Companys policies relating to conduct, ethics and business practices are followed.



46



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Consolidated Quarterly Results (unaudited)



The following table sets forth certain unaudited consolidated quarterly statement of operations data for 2006 and 2005. 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. 31,2006                             |         | Sept. 30,2006 |   | Jun. 30,2006 |  | Mar. 31,2006 |         | Dec. 31,2005 |   | Sept. 30,2005 |  | Jun. 30,2005 |         |  | Mar. 31,2005 |        
|                                                             |  |                                          |         |               |   |              | 
|                                                             |  | (in thousands, except per share amounts) |        
|Revenues                                                     |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Commissions and fees                                         |  | $                                        | 96,524  |               | $ | 95,740       |  | $            | 111,146 |              | $ | 101,905       |  | $            | 83,223  |  | $            | 74,860  |  | $ | 68,022  |   |  | $ | 70,116  |  
|Net trading revenue                                          |  |                                          | 52,657  |               |   | 42,846       |  |              | 68,220  |              |   | 80,039        |  |              | 48,792  |  |              | 52,349  |  |   | 27,051  |   |  |   | 37,422  |  
|Asset management fees                                        |  |                                          | 78,765  |               |   | 50,536       |  |              | 14,076  |              |   | 70,511        |  |              | 21,326  |  |              | 41,983  |  |   | 8,037   |   |  |   | 17,881  |  
|Interest and dividends, net                                  |  |                                          | 4,762   |               |   | 5,175        |  |              | 2,775   |              |   | 3,314         |  |              | 2,700   |  |              | 1,763   |  |   | 2,216   |   |  |   | 2,340   |  
|Investment income and other                                  |  |                                          | 27,417  |               |   | 15,711       |  |              | 8,404   |              |   | 20,687        |  |              | 45,255  |  |              | 13,141  |  |   | 6,347   |   |  |   | 9,799   |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Total revenues                                               |  |                                          | 260,125 |               |   | 210,008      |  |              | 204,621 |              |   | 276,456       |  |              | 201,297 |  |              | 184,097 |  |   | 111,673 |   |  |   | 137,557 |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Transaction-based expenses                                   |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Execution and clearance fees                                 |  |                                          | 25,857  |               |   | 22,100       |  |              | 30,026  |              |   | 28,925        |  |              | 27,947  |  |              | 24,585  |  |   | 23,348  |   |  |   | 23,547  |  
|Soft dollar and commission recapture expense                 |  |                                          | 13,964  |               |   | 16,431       |  |              | 17,355  |              |   | 17,708        |  |              | 17,634  |  |              | 15,903  |  |   | 14,650  |   |  |   | 15,485  |  
|Payments for order flow and ECN rebates                      |  |                                          | 10,529  |               |   | 9,663        |  |              | 12,126  |              |   | 9,873         |  |              | 6,377   |  |              | 3,857   |  |   | 3,582   |   |  |   | 7,404   |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Total transaction-based expenses                             |  |                                          | 50,350  |               |   | 48,194       |  |              | 59,507  |              |   | 56,506        |  |              | 51,958  |  |              | 44,344  |  |   | 41,580  |   |  |   | 46,435  |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Revenues, net of transaction-based expenses                  |  |                                          | 209,775 |               |   | 161,814      |  |              | 145,114 |              |   | 219,950       |  |              | 149,338 |  |              | 139,752 |  |   | 70,093  |   |  |   | 91,121  |  
|                                                             |  |                                          |         |               |   |              |  |             
|Other direct expenses                                        |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Employee compensation and benefits                           |  |                                          | 105,635 |               |   | 82,546       |  |              | 64,616  |              |   | 99,556        |  |              | 56,140  |  |              | 68,268  |  |   | 48,194  |   |  |   | 56,857  |  
|Communications and data processing                           |  |                                          | 8,594   |               |   | 8,484        |  |              | 8,404   |              |   | 7,638         |  |              | 8,578   |  |              | 7,969   |  |   | 8,151   |   |  |   | 7,814   |  
|Professional fees                                            |  |                                          | 5,356   |               |   | 3,737        |  |              | 5,092   |              |   | 6,383         |  |              | 5,167   |  |              | 6,056   |  |   | 4,550   |   |  |   | 3,776   |  
|Depreciation and amortization                                |  |                                          | 5,462   |               |   | 5,446        |  |              | 5,325   |              |   | 4,408         |  |              | 4,109   |  |              | 4,209   |  |   | 3,734   |   |  |   | 4,302   |  
|Occupancy and equipment rentals                              |  |                                          | 3,621   |               |   | 3,164        |  |              | 3,398   |              |   | 3,353         |  |              | 3,368   |  |              | 3,239   |  |   | 2,830   |   |  |   | 4,123   |  
|Business development                                         |  |                                          | 5,715   |               |   | 3,371        |  |              | 3,134   |              |   | 2,122         |  |              | 1,801   |  |              | 1,616   |  |   | 1,708   |   |  |   | 1,293   |  
|Writedown of assets and lease loss accrual                   |  |                                          |        |               |   |             |  |              | 482     |              |   | 7,997         |  |              |        |  |              | 5,509   |  |   | 4,546   |   |  |   |        |  
|Regulatory charges and related matters                       |  |                                          |        |               |   |             |  |              |        |              |   |              |  |              | 3,703   |  |              |        |  |   | 2,000   |   |  |   |        |  
|Other                                                        |  |                                          | 3,832   |               |   | 2,925        |  |              | 3,897   |              |   | 6,449         |  |              | 2,677   |  |              | 2,785   |  |   | 3,426   |   |  |   | 2,654   |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Total other direct expenses                                  |  |                                          | 138,215 |               |   | 109,673      |  |              | 94,348  |              |   | 137,906       |  |              | 85,543  |  |              | 99,652  |  |   | 79,139  |   |  |   | 80,820  |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Income (loss) from continuing operations before income taxes |  |                                          | 71,560  |               |   | 52,141       |  |              | 50,766  |              |   | 82,044        |  |              | 63,795  |  |              | 40,100  |  |   | (9,045  | ) |  |   | 10,301  |  
|Income tax expense (benefit)                                 |  |                                          | 24,146  |               |   | 20,681       |  |              | 20,426  |              |   | 32,912        |  |              | 21,924  |  |              | 16,137  |  |   | (3,430  | ) |  |   | 4,281   |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Net income (loss) from continuing operations                 |  |                                          | 47,414  |               |   | 31,460       |  |              | 30,340  |              |   | 49,132        |  |              | 41,871  |  |              | 23,964  |  |   | (5,616  | ) |  |   | 6,020   |  
|Income (loss) from discontinued operations, net of tax       |  |                                          |        |               |   |             |  |              |        |              |   |              |  |              |        |  |              | 388     |  |   |        |   |  |   | (266    | )
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Net income (loss)                                            |  | $                                        | 47,414  |               | $ | 31,460       |  | $            | 30,340  |              | $ | 49,132        |  | $            | 41,871  |  | $            | 24,352  |  | $ | (5,616  | ) |  | $ | 5,754   |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Diluted earnings per share from continuing operations        |  | $                                        | 0.45    |               | $ | 0.30         |  | $            | 0.29    |              | $ | 0.47          |  | $            | 0.41    |  | $            | 0.23    |  | $ | (0.05   | ) |  | $ | 0.05    |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Diluted earnings per share from discontinued operations      |  | $                                        |        |               | $ |             |  | $            |        |              | $ |              |  | $            |        |  | $            |        |  | $ |        |   |  | $ |        |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  
|Diluted earnings per share                                   |  | $                                        | 0.45    |               | $ | 0.30         |  | $            | 0.29    |              | $ | 0.47          |  | $            | 0.41    |  | $            | 0.23    |  | $ | (0.05   | ) |  | $ | 0.05    |  
|                                                             |  |                                          |         |               |   |              |  |              |         |              |   |               |  |              |         |  |              |         |  |   |         |   |  |   |         |  



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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                                                |  | 49  
|Report of Independent Registered Public Accounting Firm                                                         |  | 50  
|Consolidated Statements of Financial Condition as of December 31, 2006 and 2005                                 |  | 52  
|Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004                      |  | 53  
|Consolidated Statements of Changes in Stockholders Equity for the years ended December 31, 2006, 2005 and 2004 |  | 54  
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                      |  | 55  
|Notes to Consolidated Financial Statements                                                                      |  | 56  



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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, 2006. 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, 2006, internal control over financial reporting is
effective.



Knight managements assessment of the
effectiveness of the Companys internal control over financial reporting as of December 31, 2006 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears
herein.



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Shareholders of

Knight Capital Group, Inc.



We have completed integrated audits of Knight Capital Group, Inc.s consolidated financial statements and of its internal control over financial
reporting as of December 31, 2006, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.



Consolidated financial statements



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, 2006 and 2005, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes 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. We believe that our audits
provide a reasonable basis for our opinion.



As discussed in
Note 17 to the consolidated financial statements, the Company changed the manner in which it accounts for share-based compensation in 2006.



Internal control over financial reporting



Also, in our opinion, managements assessment, included in Managements Report on Internal Control Over Financial Reporting appearing within
this section, that the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of December 31, 2006, based on criteria established in Internal ControlIntegrated Framework issued by the COSO. The Companys management is responsible for maintaining effective internal control over financial reporting and
for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on managements assessment and on the effectiveness of the Companys internal control over financial
reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal
control over financial reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We
believe that our audit provides 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



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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 28, 2007



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KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION



|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------------- | - | ---------------- | - | ------------- | -
|                                                                                                                                                                                                                                                                                    |  | December 31,2006 |               |   | December 31,2005 |  
|Assets                                                                                                                                                                                                                                                                              |  |                  |               |   |                  |   |               |  
|Cash and cash equivalents                                                                                                                                                                                                                                                           |  | $                | 214,759,915   |   |                  | $ | 230,591,067   |  
|Securities owned, held at clearing brokers, at market value                                                                                                                                                                                                                         |  |                  | 711,774,643   |   |                  |   | 380,366,778   |  
|Receivable from brokers and dealers                                                                                                                                                                                                                                                 |  |                  | 372,897,376   |   |                  |   | 229,828,734   |  
|Asset management fees receivable                                                                                                                                                                                                                                                    |  |                  | 112,204,064   |   |                  |   | 46,464,072    |  
|Investment in Deephaven sponsored funds                                                                                                                                                                                                                                             |  |                  | 187,573,291   |   |                  |   | 281,656,753   |  
|Fixed assets and leasehold improvements, at cost, less accumulated depreciation and amortization of $98,903,086 in 2006 and $99,757,958 in
2005                                                                                                                                     |  |                  | 66,449,617    |   |                  |   | 67,656,533    |  
|Strategic investments                                                                                                                                                                                                                                                               |  |                  | 49,436,605    |   |                  |   | 31,896,425    |  
|Goodwill                                                                                                                                                                                                                                                                            |  |                  | 133,042,889   |   |                  |   | 47,682,880    |  
|Intangible assets, less accumulated amortization of $7,247,009 in 2006 and $2,434,573 in 2005                                                                                                                                                                                       |  |                  | 63,701,006    |   |                  |   | 29,773,442    |  
|Other assets                                                                                                                                                                                                                                                                        |  |                  | 116,374,310   |   |                  |   | 70,099,660    |  
|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  
|Total assets                                                                                                                                                                                                                                                                        |  | $                | 2,028,213,716 |   |                  | $ | 1,416,016,344 |  
|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  
|                                                                                                                                                                                                                                                                                    |  |                 
|Liabilities and Stockholders Equity                                                                                                                                                                                                                                                |  |                  |               |   |                  |   |               |  
|Liabilities                                                                                                                                                                                                                                                                         |  |                  |               |   |                  |   |               |  
|Securities sold, not yet purchased, at market value                                                                                                                                                                                                                                 |  | $                | 693,071,230   |   |                  | $ | 345,457,499   |  
|Payable to brokers and dealers                                                                                                                                                                                                                                                      |  |                  | 47,852,721    |   |                  |   | 35,102,415    |  
|Accrued compensation expense                                                                                                                                                                                                                                                        |  |                  | 227,846,699   |   |                  |   | 117,763,834   |  
|Accrued expenses and other liabilities                                                                                                                                                                                                                                              |  |                  | 96,956,122    |   |                  |   | 94,244,447    |  
|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  
|Total liabilities                                                                                                                                                                                                                                                                   |  |                  | 1,065,726,772 |   |                  |   | 592,568,195   |  
|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  
|                                                                                                                                                                                                                                                                                    |  |                 
|Commitments and contingent liabilities (Notes 11 and 18)                                                                                                                                                                                                                            |  |                  |               |   |                  |   |               |  
|                                                                                                                                                                                                                                                                                    |  |                 
|Stockholders equity                                                                                                                                                                                                                                                                |  |                  |               |   |                  |   |               |  
|Class A Common Stock, $0.01 par value;Shares authorized: 500,000,000 at December 31, 2006 and 2005; Shares issued: 144,958,749
at December 31, 2006 and 139,745,722 at December 31, 2005; Shares outstanding: 103,660,303 at December 31, 2006 and 102,966,359 at December 31, 2005 |  |                  | 1,449,588     |   |                  |   | 1,397,457     |  
|Additional paid-in capital                                                                                                                                                                                                                                                          |  |                  | 519,790,132   |   |                  |   | 452,839,356   |  
|Retained earnings                                                                                                                                                                                                                                                                   |  |                  | 811,859,325   |   |                  |   | 653,513,691   |  
|Treasury stock, at cost; 41,298,446 shares in 2006 and 36,779,363 shares in 2005                                                                                                                                                                                                    |  |                  | (370,612,101  | ) |                  |   | (294,652,742  | )
|Accumulated other comprehensive income, net of tax                                                                                                                                                                                                                                  |  |                  |              |   |                  |   | 10,350,387    |  
|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  
|Total stockholders equity                                                                                                                                                                                                                                                          |  |                  | 962,486,944   |   |                  |   | 823,448,149   |  
|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  
|Total liabilities and stockholders equity                                                                                                                                                                                                                                          |  | $                | 2,028,213,716 |   |                  | $ | 1,416,016,344 |  
|                                                                                                                                                                                                                                                                                    |  |                  |               |   |                  |   |               |  



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



52



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                             |  |                                  |             |      |   |             |  |   |             |  
|------------------------------------------------------------ |  | -------------------------------- | ----------- | ---- | - | ----------- |  | - | ----------- | -
|                                                             |  | For the years ended December 31, |            
|                                                             |  | 2006                             |             | 2005 |   | 2004        | 
|Revenues                                                     |  |                                  |             |      |   |             |  |   |             |  
|Commissions and fees                                         |  | $                                | 405,314,624 |      | $ | 296,221,767 |  | $ | 276,010,852 |  
|Net trading revenue                                          |  |                                  | 243,761,406 |      |   | 165,614,332 |  |   | 250,992,997 |  
|Asset management fees                                        |  |                                  | 213,887,518 |      |   | 89,226,578  |  |   | 77,658,193  |  
|Interest and dividends, net                                  |  |                                  | 16,027,113  |      |   | 9,019,081   |  |   | 4,647,059   |  
|Investment income and other                                  |  |                                  | 72,218,950  |      |   | 74,541,327  |  |   | 16,441,253  |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Total revenues                                               |  |                                  | 951,209,611 |      |   | 634,623,085 |  |   | 625,750,354 |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Transaction-based expenses                                   |  |                                  |             |      |   |             |  |   |             |  
|Execution and clearance fees                                 |  |                                  | 106,908,040 |      |   | 99,426,667  |  |   | 111,787,940 |  
|Soft dollar and commission recapture expense                 |  |                                  | 65,458,057  |      |   | 63,670,978  |  |   | 60,117,556  |  
|Payments for order flow and ECN rebates                      |  |                                  | 42,191,360  |      |   | 21,220,284  |  |   | 36,632,317  |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Total transaction-based expenses                             |  |                                  | 214,557,457 |      |   | 184,317,929 |  |   | 208,537,813 |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Revenues, net of transaction-based expenses                  |  |                                  | 736,652,154 |      |   | 450,305,156 |  |   | 417,212,541 |  
|                                                             |  |                                  |            
|Other direct expenses                                        |  |                                  |             |      |   |             |  |   |             |  
|Employee compensation and benefits                           |  |                                  | 352,353,058 |      |   | 229,459,520 |  |   | 244,549,546 |  
|Communications and data processing                           |  |                                  | 33,119,478  |      |   | 32,512,930  |  |   | 28,896,451  |  
|Depreciation and amortization                                |  |                                  | 20,641,106  |      |   | 16,354,746  |  |   | 14,247,699  |  
|Professional fees                                            |  |                                  | 20,568,212  |      |   | 19,554,523  |  |   | 14,914,772  |  
|Business development                                         |  |                                  | 14,342,728  |      |   | 6,418,984   |  |   | 8,268,973   |  
|Occupancy and equipment rentals                              |  |                                  | 13,535,902  |      |   | 13,553,631  |  |   | 16,852,358  |  
|Writedown of assets and lease loss accrual                   |  |                                  | 8,479,703   |      |   | 10,055,252  |  |   | 3,810,453   |  
|Regulatory charges and related matters                       |  |                                  |            |      |   | 5,703,428   |  |   | 79,341,732  |  
|Other                                                        |  |                                  | 17,101,352  |      |   | 11,540,764  |  |   | 6,844,285   |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Total other direct expenses                                  |  |                                  | 480,141,539 |      |   | 345,153,778 |  |   | 417,726,269 |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Income (loss) from continuing operations before income taxes |  |                                  | 256,510,615 |      |   | 105,151,378 |  |   | (513,728    | )
|Income tax expense                                           |  |                                  | 98,164,981  |      |   | 38,912,480  |  |   | 9,258,157   |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Net income (loss) from continuing operations                 |  |                                  | 158,345,634 |      |   | 66,238,898  |  |   | (9,771,885  | )
|                                                             |  |                                  |            
|Income from discontinued operations, net of tax              |  |                                  |            |      |   | 122,007     |  |   | 100,903,791 |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Net income                                                   |  | $                                | 158,345,634 |      | $ | 66,360,905  |  | $ | 91,131,906  |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Basic earnings per share from continuing operations          |  | $                                | 1.56        |      | $ | 0.64        |  | $ | (0.09       | )
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Diluted earnings per share from continuing operations        |  | $                                | 1.49        |      | $ | 0.62        |  | $ | (0.08       | )
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Basic earnings per share from discontinued operations        |  | $                                |            |      | $ |            |  | $ | 0.90        |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Diluted earnings per share from discontinued operations      |  | $                                |            |      | $ |            |  | $ | 0.86        |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Basic earnings per share                                     |  | $                                | 1.56        |      | $ | 0.64        |  | $ | 0.81        |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Diluted earnings per share                                   |  | $                                | 1.49        |      | $ | 0.62        |  | $ | 0.77        |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Shares used in computation of basic earnings per share       |  |                                  | 101,420,428 |      |   | 103,455,791 |  |   | 112,423,158 |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  
|Shares used in computation of diluted earnings per share     |  |                                  | 106,242,653 |      |   | 106,881,855 |  |   | 117,636,085 |  
|                                                             |  |                                  |             |      |   |             |  |   |             |  



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



53



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY



For the Years Ended December 31, 2004, 2005 and 2006



|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  
|------------------------------------------------------------------- |  | -------------------- |  | -------------- | --------- | ------ | ------------------------ | - | ---------------- | - | ----------------------------------- | - |  | ----- | ----------- |  | - | ----------- |  | - | ----------- | - |  | - | ------------ | -
|                                                                    |  | Class A Common Stock |  | Treasury Stock |           |        | AdditionalPaid-InCapital |   | RetainedEarnings |   | AccumulatedOtherComprehensiveIncome |   |  | Total |            
|                                                                    |  | Shares               |  | Amount         |           | Shares |                          |   | Amount           |   |                                     |   |  |      
|Balance, January 1, 2004                                            |  | 128,187,060          |  | $              | 1,281,871 |        | (13,076,505              | ) |                  | $ | (68,795,258                         | ) |  | $     | 358,588,409 |  | $ | 496,020,880 |  | $ |            |   |  | $ | 787,095,902  |  
|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  
|Net income                                                          |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       |            |  |   | 91,131,906  |  |   |            |   |  |   | 91,131,906   |  
|Common stock repurchased                                            |  |                     |  |                |          |        | (7,593,817               | ) |                  |   | (78,841,155                         | ) |  |       |            |  |   |            |  |   |            |   |  |   | (78,841,155  | )
|Stock options exercised                                             |  | 4,527,202            |  |                | 45,272    |        |                         |   |                  |   |                                    |   |  |       | 27,163,276  |  |   |            |  |   |            |   |  |   | 27,208,548   |  
|Income tax benefitstock awards exercised                           |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       | 11,392,768  |  |   |            |  |   |            |   |  |   | 11,392,768   |  
|Stock-based compensation                                            |  | 1,251,251            |  |                | 12,512    |        |                         |   |                  |   |                                    |   |  |       | 13,201,413  |  |   |            |  |   |            |   |  |   | 13,213,925   |  
|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  
|Balance, December 31, 2004                                          |  | 133,965,513          |  |                | 1,339,655 |        | (20,670,322              | ) |                  |   | (147,636,413                        | ) |  |       | 410,345,866 |  |   | 587,152,786 |  |   |            |   |  |   | 851,201,894  |  
|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  
|Net income                                                          |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       |            |  |   | 66,360,905  |  |   |            |   |  |   | 66,360,905   |  
|Unrealized gains on available-for-sale securities, net of taxes     |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       |            |  |   |            |  |   | 10,350,387  |   |  |   | 10,350,387   |  
|Common stock repurchased                                            |  |                     |  |                |          |        | (16,109,041              | ) |                  |   | (147,016,329                        | ) |  |       |            |  |   |            |  |   |            |   |  |   | (147,016,329 | )
|Stock options exercised                                             |  | 3,952,173            |  |                | 39,522    |        |                         |   |                  |   |                                    |   |  |       | 22,477,438  |  |   |            |  |   |            |   |  |   | 22,516,960   |  
|Income tax benefitstock awards exercised                           |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       | 6,625,852   |  |   |            |  |   |            |   |  |   | 6,625,852    |  
|Stock-based compensation                                            |  | 1,828,036            |  |                | 18,280    |        |                         |   |                  |   |                                    |   |  |       | 13,390,200  |  |   |            |  |   |            |   |  |   | 13,408,480   |  
|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  
|Balance, December 31, 2005                                          |  | 139,745,722          |  |                | 1,397,457 |        | (36,779,363              | ) |                  |   | (294,652,742                        | ) |  |       | 452,839,356 |  |   | 653,513,691 |  |   | 10,350,387  |   |  |   | 823,448,149  |  
|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  
|Net income                                                          |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       |            |  |   | 158,345,634 |  |   |            |   |  |   | 158,345,634  |  
|Realization of gains on available-for-sale securities, net of taxes |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       |            |  |   |            |  |   | (10,350,387 | ) |  |   | (10,350,387  | )
|Common stock repurchased                                            |  |                     |  |                |          |        | (4,519,083               | ) |                  |   | (75,959,359                         | ) |  |       |            |  |   |            |  |   |            |   |  |   | (75,959,359  | )
|Stock options exercised                                             |  | 4,522,922            |  |                | 45,230    |        |                         |   |                  |   |                                    |   |  |       | 26,742,229  |  |   |            |  |   |            |   |  |   | 26,787,459   |  
|Income tax benefitstock awards exercised                           |  |                     |  |                |          |        |                         |   |                  |   |                                    |   |  |       | 19,405,109  |  |   |            |  |   |            |   |  |   | 19,405,109   |  
|Stock-based compensation                                            |  | 690,105              |  |                | 6,901     |        |                         |   |                  |   |                                    |   |  |       | 20,803,438  |  |   |            |  |   |            |   |  |   | 20,810,339   |  
|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  
|Balance, December 31, 2006                                          |  | 144,958,749          |  | $              | 1,449,588 |        | (41,298,446              | ) |                  | $ | (370,612,101                        | ) |  | $     | 519,790,132 |  | $ | 811,859,325 |  | $ |            |   |  | $ | 962,486,944  |  
|                                                                    |  |                      |  |                |           |        |                          |   |                  |   |                                     |   |  |       |             |  |   |             |  |   |             |   |  |   |              |  



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



54



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.



CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------ |  | -------------------------------- | ------------ | - | ---- | - | ------------ | ---- |  | - | ----------- | -
|                                                                                                                                     |  | For the years ended December 31, |             
|                                                                                                                                     |  | 2006                             |              |   | 2005 |   |              | 2004 | 
|Cash flows from operating activities                                                                                                 |  |                                  |              |   |      |   |              |      |  |   |             |  
|Net income                                                                                                                           |  | $                                | 158,345,634  |   |      | $ | 66,360,905   |      |  | $ | 91,131,906  |  
|Income from discontinued operations, net of tax                                                                                      |  |                                  |             |   |      |   | 122,007      |      |  |   | 100,903,791 |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Income (loss) from continuing operations, net of tax                                                                                 |  |                                  | 158,345,634  |   |      |   | 66,238,898   |      |  |   | (9,771,885  | )
|                                                                                                                                     |  |                                  |             
|Adjustments to reconcile income (loss) from continuing operations, net of tax to net cash provided by (used in) operating
activities |  |                                  |              |   |      |   |              |      |  |   |             |  
|Depreciation and amortization                                                                                                        |  |                                  | 20,641,106   |   |      |   | 16,354,746   |      |  |   | 14,247,699  |  
|Income tax benefit on stock awards exercised                                                                                         |  |                                  |             |   |      |   | 6,625,852    |      |  |   | 11,392,768  |  
|Stock-based compensation                                                                                                             |  |                                  | 20,810,339   |   |      |   | 13,408,873   |      |  |   | 10,003,722  |  
|Deferred income taxes                                                                                                                |  |                                  | (23,845,909  | ) |      |   | 3,000,067    |      |  |   | (8,509,592  | )
|Deferred rent                                                                                                                        |  |                                  | 779,602      |   |      |   | 620,714      |      |  |   | 3,793,700   |  
|Writedown of assets and lease loss accrual                                                                                           |  |                                  | 8,479,703    |   |      |   | 10,055,252   |      |  |   | 3,810,453   |  
|Unrealized loss (gain) on strategic investments                                                                                      |  |                                  | 788,870      |   |      |   | 747,993      |      |  |   | (41,087     | )
|Realized gain on strategic investments                                                                                               |  |                                  | (30,132,805  | ) |      |   | (56,220,768  | )    |  |   |            |  
|Appreciation on investments in Deephaven sponsored funds                                                                             |  |                                  | (34,182,260  | ) |      |   | (16,326,795  | )    |  |   | (12,751,853 | )
|Operating activities from discontinued operations                                                                                    |  |                                  |             |   |      |   | 122,007      |      |  |   | 43,529,819  |  
|(Increase) decrease in operating assets                                                                                              |  |                                  |              |   |      |   |              |      |  |   |             |  
|Securities owned                                                                                                                     |  |                                  | (331,407,865 | ) |      |   | (125,893,569 | )    |  |   | (53,234,639 | )
|Receivable from brokers and dealers                                                                                                  |  |                                  | (142,396,516 | ) |      |   | 16,979,593   |      |  |   | (39,861,433 | )
|Asset management fees receivable                                                                                                     |  |                                  | (65,739,922  | ) |      |   | (9,065,971   | )    |  |   | (10,662,829 | )
|Other assets                                                                                                                         |  |                                  | (18,907,195  | ) |      |   | 1,816,300    |      |  |   | (872,959    | )
|Increase (decrease) in operating liabilities                                                                                         |  |                                  |              |   |      |   |              |      |  |   |             |  
|Securities sold, not yet purchased                                                                                                   |  |                                  | 347,613,731  |   |      |   | 124,036,930  |      |  |   | 48,301,776  |  
|Payable to brokers and dealers                                                                                                       |  |                                  | 12,700,452   |   |      |   | (53,378,373  | )    |  |   | 61,667,776  |  
|Accrued compensation expense                                                                                                         |  |                                  | 109,318,060  |   |      |   | (6,113,996   | )    |  |   | 29,029,978  |  
|Accrued expenses and other liabilities                                                                                               |  |                                  | (17,210,266  | ) |      |   | (33,005,836  | )    |  |   | (16,678,380 | )
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Net cash provided by (used in) operating activities                                                                                  |  |                                  | 15,654,759   |   |      |   | (39,998,083  | )    |  |   | 73,393,034  |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Cash flows from investing activities                                                                                                 |  |                                  |              |   |      |   |              |      |  |   |             |  
|Proceeds from sale of Derivative Markets business                                                                                    |  |                                  |             |   |      |   |             |      |  |   | 230,380,605 |  
|Purchases of fixed assets and leasehold improvements                                                                                 |  |                                  | (12,976,238  | ) |      |   | (25,657,084  | )    |  |   | (40,184,593 | )
|Redemptions of Deephaven sponsored funds                                                                                             |  |                                  | 129,575,433  |   |      |   | 105,000,000  |      |  |   | 40,026,963  |  
|Investments in Deephaven sponsored funds                                                                                             |  |                                  | (1,309,711   | ) |      |   | (155,000,000 | )    |  |   | (45,000,000 | )
|Proceeds from sale of strategic investments                                                                                          |  |                                  | 33,081,749   |   |      |   | 73,963,674   |      |  |   |            |  
|Purchases of strategic investments                                                                                                   |  |                                  | (38,771,099  | ) |      |   | (3,650,000   | )    |  |   | (8,926,007  | )
|Purchases of businesses, net of cash acquired                                                                                        |  |                                  | (95,808,721  | ) |      |   | (45,107,353  | )    |  |   | (2,500,000  | )
|Contingent payments on purchases of businesses                                                                                       |  |                                  | (15,510,533  | ) |      |   |             |      |  |   |            |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Net cash (used in) provided by investing activities                                                                                  |  |                                  | (1,719,120   | ) |      |   | (50,450,763  | )    |  |   | 173,796,968 |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Cash flows from financing activities                                                                                                 |  |                                  |              |   |      |   |              |      |  |   |             |  
|Stock options exercised                                                                                                              |  |                                  | 26,787,459   |   |      |   | 22,516,960   |      |  |   | 27,192,742  |  
|Income tax benefit on stock awards exercised                                                                                         |  |                                  | 19,405,109   |   |      |   |             |      |  |   |            |  
|Cost of common stock repurchased                                                                                                     |  |                                  | (75,959,359  | ) |      |   | (147,016,329 | )    |  |   | (78,841,155 | )
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Net cash used in financing activities                                                                                                |  |                                  | (29,766,791  | ) |      |   | (124,499,369 | )    |  |   | (51,648,413 | )
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|(Decrease) increase in cash and cash equivalents                                                                                     |  |                                  | (15,831,152  | ) |      |   | (214,948,215 | )    |  |   | 195,541,589 |  
|Cash and cash equivalents at beginning of period                                                                                     |  |                                  | 230,591,067  |   |      |   | 445,539,282  |      |  |   | 249,997,693 |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Cash and cash equivalents at end of period                                                                                           |  | $                                | 214,759,915  |   |      | $ | 230,591,067  |      |  | $ | 445,539,282 |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Supplemental disclosure of cash flow information:                                                                                    |  |                                  |              |   |      |   |              |      |  |   |             |  
|Cash paid for interest                                                                                                               |  | $                                | 408,493      |   |      | $ | 576,361      |      |  | $ | 339,231     |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Cash paid for income taxes                                                                                                           |  | $                                | 102,746,795  |   |      | $ | 52,563,496   |      |  | $ | 26,917,732  |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Supplemental disclosure of noncash investing activities:                                                                             |  |                                  |              |   |      |   |              |      |  |   |             |  
|Goodwill                                                                                                                             |  | $                                | 69,849,472   |   |      | $ | 28,500,631   |      |  | $ | 2,500,000   |  
|Intangible assets                                                                                                                    |  |                                  | 38,740,000   |   |      |   | 20,000,000   |      |  |   |            |  
|Fixed assets                                                                                                                         |  |                                  | 1,802,799    |   |      |   | 3,000,000    |      |  |   |            |  
|Receivable from brokers and dealers                                                                                                  |  |                                  |             |   |      |   | 1,927,262    |      |  |   |            |  
|Other net liabilities                                                                                                                |  |                                  | (14,583,550  | ) |      |   | (8,320,540   | )    |  |   |            |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  
|Cash paid for purchases of businesses, net of cash acquired                                                                          |  | $                                | 95,808,721   |   |      | $ | 45,107,353   |      |  | $ | 2,500,000   |  
|                                                                                                                                     |  |                                  |              |   |      |   |              |      |  |   |             |  



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



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KNIGHT CAPITAL GROUP, INC.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



1.    Organization and Description of the Business



Knight Capital Group, Inc. and its subsidiaries (the Company) have two operating business segments, Asset Management and Global Markets, as well as a Corporate segment. As of December 31, 2006, the
Companys operating business segments from continuing operations comprised the following operating subsidiaries:



Asset Management



| |  |  | Deephaven Capital Management LLC (Deephaven) is the registered investment adviser to and sponsor of the Deephaven investment funds (the Deephaven
Funds). Deephaven is also registered with the Commodity Futures Trading Commission (CFTC) as a commodity pool operator and a commodity trading adviser, and is a member of the National Futures Association
(NFA). Due to the nature of Deephavens investor base, however, Deephaven is exempt from many of the CFTC/NFA regulations. Deephaven also has a U.K. registered investment adviser subsidiary, which is regulated by the Financial
Services Authority (FSA) in the U.K., and a Hong Kong registered investment adviser subsidiary, which is regulated by the Hong Kong Securities and Futures Commission.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Global Markets



| |  |  | Knight Equity Markets, L.P. (KEM) 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. (Donaldson), a division of KEM, offers soft dollar and commission recapture
services. KEM is a broker-dealer registered with the Securities and Exchange Commission (SEC or Commission) and is a member of the Nasdaq Stock Exchange (Nasdaq), National Association of Securities Dealers
(NASD), the International Securities Exchange, LLC, the National Stock Exchange and the NFA.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Knight Capital Markets LLC (KCM) primarily operates as a market-maker in the Nasdaq Intermarket, the over-the-counter market for New York Stock Exchange (NYSE) and American Stock Exchange (AMEX)
listed securities. KCM is a broker-dealer registered with the SEC and is a member of Nasdaq and the NASD.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 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 and virt-x.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Direct Trading Institutional, L.P. (Direct Trading) provides institutions with direct market access trading through Knight Direct, an advanced
electronic platform. The business of Direct Trading was acquired by the Company in June 2005. Direct Trading is a broker-dealer registered with the SEC and is a member of Nasdaq, the NASD and the NFA.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Direct Edge ECN LLC (Direct Edge) operates as an electronic communications network (ECN). Direct Edge is a liquidity destination offering
the ability to match trades in Nasdaq National Market, Nasdaq SmallCap and NYSE and AMEX listed securities by displaying orders in the NASD Alternative Display Facility. The business of Direct Edge was acquired by the Company in October 2005. Direct
Edge is a broker-dealer registered with the SEC and is a member of Nasdaq, the NASD and the National Stock Exchange.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Hotspot FX, Inc. and its subsidiaries (Hotspot) provide institutions, dealers and retail clients with spot foreign exchange executions through an
advanced, fully electronic platform. Hotspot was acquired by the Company in April 2006. One Hotspot subsidiary is regulated by the FSA and another Hotspot subsidiary is a Futures Commission Merchant registered with the CFTC and is a member of the
NFA.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | ValuBond Securities, Inc. (ValuBond) provides electronic access and trade execution products for the fixed income market. ValuBond was acquired by the
Company in October 2006. ValuBond is registered with the SEC and is a member of the NASD and the Municipal Securities Rulemaking Board (MSRB).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Corporate segment includes all corporate overhead expenses and investment income earned on strategic investments and the
corporate investment in the Deephaven Funds. 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, 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) for $237 million in December of 2004. In accordance with generally accepted accounting principles
(GAAP), the results of the Derivative Markets segment have been included within discontinued operations for 2005 and 2004. For a further discussion of the sale of the Companys Derivative Markets business and its associated
accounting treatment, see Footnote 9 Discontinued Operations.



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, include the accounts of the Company and its subsidiaries. All
significant intercompany transactions and balances have been eliminated.



Certain prior year amounts have been reclassified to conform to the current year presentation.



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 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.



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. Soft dollar and commission recapture expense represents payments to
institutions in connection with soft dollar and commission recapture programs. The Companys clearing agreements call for payment or receipt of interest income, net of interest expense, for facilitating the settlement and financing of
securities transactions.



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Asset management fees



Deephaven earns asset management fees for sponsoring and managing the Deephaven Funds. These fees are recorded monthly as
earned and are calculated as a percentage of each Deephaven Funds monthly net assets, plus a percentage of a new high net asset value (the Incentive Allocation Fee), as defined in the applicable private placement offering
memorandum, for any six month period ended June 30th or December 31st. A new high net asset value is defined as the amount by which the net asset value of the particular Deephaven fund exceeds the greater of either the highest previous net
asset value in that Deephaven fund or the net asset value at the time each investor made a purchase. The Incentive Allocation Fee may increase or decrease during the year based on the performance of the Deephaven Funds.



Estimated fair value of financial instruments



The market value of securities owned and securities sold, not yet purchased
is estimated using market quotations available from major securities exchanges, clearing brokers and dealers. Management estimates that the fair values of other financial instruments recognized on the Consolidated Statements of Financial Condition
(including receivables, payables and accrued expenses) approximate their carrying values, as such financial instruments are short-term in nature, bear interest at current market rates or are subject to frequent repricing.



Goodwill and Intangible Assets



The Company applies the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and Other Intangible Assets,which requires that goodwill and intangible assets with an indefinite useful life no longer be amortized, but instead, 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.



Strategic investments



Strategic investments include non-controlling equity ownership interests in financial services-related businesses and 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 fair value of investments recorded in the Companys broker-dealer subsidiaries, for which a quoted market or dealer price is not available for the size of the Companys investment,
is based on managements estimate. Among the factors considered by management in determining the fair value of these investments are the cost of the investment, terms and liquidity, developments since the acquisition of the investment, the
sales price of recently issued securities, the financial condition and operating results of the issuer, earnings trends and consistency of operating cash flows, the long-term business potential of the issuer, the quoted market price of securities
with similar quality and yield that are publicly traded, and other factors generally pertinent to the valuation of investments. The fair value of these investments is subject to a high degree of volatility and may be susceptible to significant
fluctuations in the near term.



Investments classified as
available-for-sale are reported at fair value with unrealized gains and losses excluded from earnings and reported in Accumulated other comprehensive income, net of tax within Stockholders equity on the Consolidated Statements of Financial
Condition.



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.



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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.



Foreign currencies



The functional currency of the Companys foreign subsidiaries is the U.S. dollar. Assets and liabilities 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 income and other on the Companys Consolidated Statements of Operations.



Depreciation, amortization and occupancy



Fixed assets are being 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 records rent expense on a straight-line basis over the lives of the leases. 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.



Writedown of fixed assets



Writedowns of fixed assets are recognized when it is determined that the
fixed assets are impaired. The amount of the impairment writedown is determined by the difference between the carrying amount and the estimated fair value of the fixed asset. In determining the impairment, an estimated fair value is obtained through
research and inquiry of the market. Fixed assets are reviewed for impairment on a periodic basis.



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.



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.



Discontinued Operations



In accordance with SFAS No. 144,Accounting for the Disposal of Long-Lived Assets(SFAS No. 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 Income from discontinued operations, net of tax, on the Consolidated Statements of Operations for all periods presented.



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Stock-Based Compensation



On January 1, 2006, the Company adopted SFAS No. 123-R, Share-Based Payment (SFAS
No. 123-R), using the modified prospective method. Under SFAS No. 123-R, the grant date fair values of stock-based employee awards that require future service are amortized over the relevant service period. Prior to the
adoption of SFAS No. 123-R, the Company applied Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25) and related interpretations in accounting for its stock option plans. As
options that were granted to employees prior to the adoption of SFAS No. 123-R were granted at the then market value, no compensation expense had been recognized for the fair values of such grants under APB 25.



Upon the adoption of SFAS No. 123-R, the Company changed its expense
attribution method for options. For option awards granted subsequent to the adoption of SFAS No. 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 No. 123-R, the Company will continue 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 No. 123-R requires expected forfeitures to be considered in determining stock-based employee compensation expense. Prior to the adoption of SFAS
No. 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. In 2006, 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 2006.



For stock-based payments issued after the adoption of SFAS No. 123-R,
the Company applies a non-substantive vesting period approach whereby the expense is accelerated for those employees that receive awards and are eligible to retire prior to the award vesting. Prior to the adoption of SFAS No. 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 would not have had a material impact
on the results of operations for the periods presented herein.



Prior to the adoption of SFAS No. 123-R, the Company presented all tax benefits resulting from stock-based compensation as cash flows from operating activities in the Consolidated Statements of Cash Flows. SFAS No. 123-R requires
that the benefits of tax deductions in excess of compensation cost recognized for those options (excess tax benefits) be included in cash flows from financing activities. The income tax benefit on stock awards exercised in 2006 of $19.4 million is
included in cash flows from financing activities.



Had
compensation expense for the Companys options been determined based on the fair values at the grant dates in accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the Companys pro forma net income and
earnings per share amounts for the years ended December 31, 2005 and 2004, would have been as follows (in millions, except per share data):



|                                                                                    |  |      |      |   |      |   |      |  
|----------------------------------------------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | -
|                                                                                    |  | 2005 |      |   | 2004 |  
|Net income, as reported                                                             |  | $    | 66.4 |   |      | $ | 91.1 |  
|Pro forma compensation expense determined under fair value based method, net of tax |  |      | (5.5 | ) |      |   | (6.7 | )
|Pro forma net income                                                                |  |      | 60.8 |   |      |   | 84.4 |  
|Basic earnings per share, as reported                                               |  |      | 0.64 |   |      |   | 0.81 |  
|Diluted earnings per share, as reported                                             |  |      | 0.62 |   |      |   | 0.77 |  
|Pro forma basic earnings per share                                                  |  |      | 0.59 |   |      |   | 0.75 |  
|Pro forma diluted earnings per share                                                |  |      | 0.57 |   |      |   | 0.72 |  



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Other



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.



3.    Securities Owned and Securities Sold, Not Yet
Purchased



Securities owned and securities sold, not yet
purchased are carried at market value and consist of the following (in millions):



|                                    |  |                  |       |                  |   |      
|----------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                                    |  | December 31,2006 |       | December 31,2005
|Securities owned:                   |  |                  |       |                  |   |      
|Equities                            |  | $                | 703.0 |                  | $ | 372.0
|U.S. government obligations         |  |                  | 8.8   |                  |   | 8.4  
|                                    |  |                  |       |                  |   |      
|                                    |  | $                | 711.8 |                  | $ | 380.4
|                                    |  |                  |       |                  |   |      
|Securities sold, not yet purchased: |  |                  |       |                  |   |      
|Equities                            |  | $                | 693.1 |                  | $ | 345.5
|                                    |  |                  |       |                  |   |      
|                                    |  | $                | 693.1 |                  | $ | 345.5
|                                    |  |                  |       |                  |   |      



4.    Receivable from/Payable to Brokers and Dealers



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



|                                 |  |                  |       |                  |   |      
|-------------------------------- |  | ---------------- | ----- | ---------------- | - | -----
|                                 |  | December 31,2006 |       | December 31,2005
|Receivable:                      |  |                  |       |                  |   |      
|Clearing brokers and other       |  | $                | 305.3 |                  | $ | 182.0
|Securities failed to deliver     |  |                  | 42.3  |                  |   | 42.1 
|Deposits for securities borrowed |  |                  | 25.2  |                  |   | 5.7  
|                                 |  |                  |       |                  |   |      
|                                 |  | $                | 372.9 |                  | $ | 229.8
|                                 |  |                  |       |                  |   |      
|Payable:                         |  |                  |       |                  |   |      
|Securities failed to receive     |  | $                | 34.4  |                  | $ | 34.2 
|Clearing brokers and other       |  |                  | 13.4  |                  |   | 0.9  
|                                 |  |                  |       |                  |   |      
|                                 |  | $                | 47.9  |                  | $ | 35.1 
|                                 |  |                  |       |                  |   |      



5.    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 2006, the Company tested for the impairment of goodwill
and intangible assets and concluded that there was no impairment.



The goodwill balance of $133.0 million at December 31, 2006 relates to the Global Markets segment. Goodwill is net of accumulated amortization of $21.9 million recorded through December 31, 2001, the effective date the Company
adopted SFAS No. 142. Goodwill increased by $28.5 million in 2005 resulting from the



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purchase of the businesses now operating as Direct Trading and Direct Edge. In 2006, the Company paid $15.5 million relating to contingent payment
obligations incurred in the acquisition of these two businesses, resulting in an increase in goodwill. Goodwill also increased in 2006 by $55.7 million and $14.1 million in connection with the acquisitions of Hotspot and ValuBond, respectively.



The Company had intangible assets, net of accumulated
amortization, of $29.8 million and $63.7 million at December 31, 2005 and 2006, respectively, all included within the Global Markets business segment. The balance at December 31, 2005 resulted primarily from the purchase of the Donaldson
business, which represents $10.8 million of the balance, and the Direct Trading business, which represents $18.8 million. In 2006, intangible assets increased by $35.0 million and $3.7 million as a result of the acquisitions of Hotspot and ValuBond,
respectively. Intangible assets primarily represents client relationships and are being amortized over their remaining useful lives, which have been determined to range from two to thirty years.



In 2006, the Company recorded amortization expense, related to its intangible
assets of $4.8 million. The estimated amortization expense relating to the intangible assets for each of the next five years approximates $5.7 million in 2007 and 2008, $5.1 million in 2009, and $4.9 million in 2010 and 2011.



The chart below summarizes the activity of the Companys Goodwill and
Intangible assets, net of accumulated amortization, from continuing operations, for 2005 and 2006 (in millions):



|                                               |  |          |       |                   |   |      |  
|---------------------------------------------- |  | -------- | ----- | ----------------- | - | ---- | -
|                                               |  | Goodwill |       | Intangible Assets |  
|Balance at January 1, 2005                     |  | $        | 19.2  |                   | $ | 11.5 |  
|Purchase of Direct Trading business            |  |          | 20.7  |                   |   | 20.0 |  
|Purchase of ATTAIN ECN business                |  |          | 7.8   |                   |   |     |  
|Amortization expense                           |  |          |      |                   |   | (1.8 | )
|                                               |  |          |       |                   |   |      |  
|Balance at December 31, 2005                   |  |          | 47.7  |                   |   | 29.8 |  
|Contingent payments on purchases of businesses |  |          | 15.5  |                   |   |     |  
|Purchase of Hotspot                            |  |          | 55.7  |                   |   | 35.0 |  
|Purchase of Valubond                           |  |          | 14.1  |                   |   | 3.7  |  
|Amortization expense                           |  |          |      |                   |   | (4.8 | )
|                                               |  |          |       |                   |   |      |  
|Balance at December 31, 2006                   |  | $        | 133.0 |                   | $ | 63.7 |  
|                                               |  |          |       |                   |   |      |  



The acquisition of the
business of Direct Trading contains a two-year contingency from the date of closing, of which one year is remaining, for additional consideration based on the profitability of the business. The acquisition of Direct Edge contains a four-year
contingency from the date of closing, of which three years remain, for additional consideration based on meeting certain revenue and client retention metrics.



6.    Investment in Deephaven-Sponsored Funds and Strategic Investments



The Companys wholly-owned subsidiary, 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 $4.2 billion and $2.9 billion of assets under management in
the Deephaven Funds as of December 31, 2006 and 2005, respectively, the Company had corporate investments of $187.6 million and $281.7 million, respectively. Other assets on the Consolidated Statements of Financial Condition at
December 31, 2006 and 2005 included $31.6 million and $17.2 million, respectively, of investments in the Deephaven Funds related to employee deferred compensation plans. Certain officers, directors and employees of the Company held direct
investments of approximately $6.2 million and $3.7 million in the Deephaven Funds, in the aggregate, as of December 31, 2006 and 2005, respectively.



Included in Investment income and other on the Companys Consolidated Statements of Operations is income from the Companys corporate
investments in the Deephaven Funds of $34.2 million, $16.3 million and $12.8 million for 2006, 2005 and 2004, respectively.



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In connection with the sale of the Derivative Markets business at the end of 2004 (see Footnote 9,
Discontinued Operations) and in light of the reorganization of the Companys business segments, the Company transferred its investments in the International Securities Exchange, Inc. (ISE) and the Nasdaq Stock Market,
Inc. (Nasdaq Inc.), which were previously held by its broker-dealer subsidiaries, to a corporate investment holding company. During the first quarter of 2005, these equity investments became marketable and, accordingly, were accounted
for as equity securities under SFAS No. 115 Accounting for Certain Investments in Debt and Equity Securities and were classified as available-for-sale securities. In conjunction with the ISEs initial public and secondary offerings,
the Company sold approximately 70% of its original equity investment in the ISE during 2005 for $41.1 million. Based on an original cost of $6.9 million, the Company recognized a pre-tax gain of $34.2 million. The Company sold its entire Nasdaq Inc.
equity investment during 2005 for $36.9 million. Based on an adjusted cost of $15.2 million, the Company recognized a pre-tax gain of $21.7 million on the Nasdaq Inc. sale. In 2006 the Company sold its remaining shares of the ISE, having a cost
basis of $2.9 million, for $33.1 million, resulting in a pre-tax gain of $30.1 million. The gains on the sales of the ISE and Nasdaq Inc. investments are included in Investment income and other on the Companys Consolidated Statements of
Operations.



7.    Significant Clients



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. One client accounted for approximately 10.9%, 10.7% and 11.8% of the Companys U.S. equity dollar value traded during 2006, 2005 and 2004,
respectively.



No investor accounted for more than 10% of the
Deephaven Funds asset under management as of December 31, 2006. One investor accounted for 10.1% and 13.2% of the Deephaven Funds asset under management as of December 31, 2005 and 2004, respectively.



8.    Writedown of Assets and Lease Loss Accrual



The Writedown of assets and lease loss accrual during 2006, 2005 and 2004
were $8.5 million, $10.1 million, and $3.8 million, respectively. 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. The charges in
2005 consist of $4.5 million of costs associated with excess real estate capacity and a writedown of fixed assets related to the move from the Companys 525 Washington Boulevard facility in Jersey City, N.J., and $5.5 million in costs
associated with excess real estate capacity at the 545 Washington Boulevard facility. The charges in 2004 consist of costs associated with excess real estate capacity, primarily in Jersey City, N.J.



9.    Discontinued Operations



The Company completed the sale of its Derivative Markets business to
Citigroup for $237 million in cash in December 2004. 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 accordance with SFAS No. 144, the results of the Derivative Markets segment, the revenues and expenses associated with these businesses as well as all costs associated with the
sale transaction have been included in Income from discontinued operations, net of tax on the Consolidated Statements of Operations for all periods presented. The final purchase price was subject to adjustment based on the final determination of the
book value of the Derivative Markets segment at the time the deal closed. The final determination of book value occurred in the first quarter of 2005, at which time the adjustment was recognized. The result of this adjustment and other expenses
related to the sale resulted in income of $122,000, net of tax, in 2005. For the year ended December 31, 2004, the net gain on the sale of the Derivative Markets business of $80 million is included in Income from discontinued operations, net of
tax.



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The revenues and results of operations of the discontinued operations for 2005 and 2004 are summarized as
follows (in millions):



|                                                                                      |  |      |      
|------------------------------------------------------------------------------------- |  | ---- | -----
|                                                                                      |  | 2005
|Revenues                                                                              |  | $    |     
|                                                                                      |  |      |      
|Pre-tax gain on sale of Derivative Markets business, net of transaction related costs |  | $    | 0.2  
|Income tax expense                                                                    |  |      | 0.1  
|                                                                                      |  |      |      
|Income from discontinued operations, net of tax                                       |  | $    | 0.1  
|                                                                                      |  |      |      
|                                                                                      | 
|                                                                                      |  | 2004
|Revenues                                                                              |  | $    | 176.8
|                                                                                      |  |      |      
|Pre-tax income from discontinued operations, before sale of business                  |  | $    | 35.5 
|Pre-tax gain on sale of Derivative Markets business, net of transaction related costs |  |      | 128.5
|                                                                                      |  |      |      
|Pre-tax income from discontinued operations                                           |  |      | 164.0
|Income tax expense                                                                    |  |      | 63.1 
|                                                                                      |  |      |      
|Income from discontinued operations, net of tax                                       |  | $    | 100.9
|                                                                                      |  |      |      



10.    Fixed
Assets and Leasehold Improvements



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



|                                               |  |                    |      |              |       |  |   |      
|---------------------------------------------- |  | ------------------ | ---- | ------------ | ----- |  | - | -----
|                                               |  | DepreciationPeriod |      | December 31,
|                                               |  |                    | 2006 |              | 2005 
|Computer hardware and software                 |  | 3 years            |      | $            | 95.8  |  | $ | 93.2 
|Leasehold improvements                         |  | *                  |      |              | 51.0  |  |   | 57.0 
|Telephone systems                              |  | 5 years            |      |              | 9.4   |  |   | 8.7  
|Furniture and fixtures                         |  | 7 years            |      |              | 6.7   |  |   | 6.0  
|Trading systems and equipment                  |  | 5 years            |      |              | 2.5   |  |   | 2.5  
|                                               |  |                    |      |              |       |  |   |      
|                                               |  |                    |      |              | 165.4 |  |   | 167.4
|LessAccumulated depreciation and amortization |  |                    |      |              | 98.9  |  |   | 99.8 
|                                               |  |                    |      |              |       |  |   |      
|                                               |  |                    |      | $            | 66.5  |  | $ | 67.7 
|                                               |  |                    |      |              |       |  |   |      

---

*  -  Shorter of Life of Lease or
Life of Useful Assets



11.    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. We are subject to several of these matters at the present time. The results of these matters cannot be predicted with certainty.
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.



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The Company leases office space under noncancelable operating leases. Certain office leases contain fixed
escalation clauses. Rental expense from continuing operations under the office leases was $8.6 million, $9.2 million and $10.4 million in 2006, 2005 and 2004, respectively and is included in Occupancy and equipment rentals on the Consolidated
Statements of Operations.



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, 2006, future minimum rental commitments under all noncancelable office, computer and
equipment leases (Operating Leases), and guaranteed employment contracts longer than one year (Other Obligations) were as follows (in millions):



Lease & Contract Obligations



|                                    |  |                  |       |                  |   |       |  |   |      
|----------------------------------- |  | ---------------- | ----- | ---------------- | - | ----- |  | - | -----
|                                    |  | Operating Leases |       | OtherObligations |   | Total
|Year ending December 31, 2007       |  | $                | 11.3  |                  | $ | 30.4  |  | $ | 41.6 
|Year ending December 31, 2008       |  |                  | 10.7  |                  |   | 25.4  |  |   | 36.1 
|Year ending December 31, 2009       |  |                  | 10.2  |                  |   | 14.9  |  |   | 25.1 
|Year ending December 31, 2010       |  |                  | 9.6   |                  |   |      |  |   | 9.6  
|Year ending December 31, 2011       |  |                  | 10.4  |                  |   |      |  |   | 10.4 
|Thereafter through October 31, 2021 |  |                  | 101.1 |                  |   |      |  |   | 101.1
|                                    |  |                  |       |                  |   |       |  |   |      
|                                    |  | $                | 153.3 |                  | $ | 70.6  |  | $ | 223.9
|                                    |  |                  |       |                  |   |       |  |   |      



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, 2006, the Company has provided a letter of credit for $6.0
million, collateralized by U.S. Treasury Bills, as a guarantee for one of the Companys lease obligations.



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 2005 and 2006, represented 50% of
pre-tax earnings prior to the profit-sharing bonuses. The employment agreements included an option for renewal by the Deephaven managers through 2009 under the identical financial terms; however, the renewal option was not exercised. Pursuant to the
terms of a simultaneously executed option agreement between the Company and these senior Deephaven managers, in the event of a change of control of the Company during the initial three-year employment term, the Deephaven senior managers had the
option to obtain a 51% interest in Deephaven in exchange for the termination of their employment contracts and associated profit-sharing bonuses. As the Company did not experience a change of control during the term of these employment contracts,
this option expired.



In December 2006, the Company entered
into new long-term employment agreements with three senior managers of Deephaven (the Deephaven Managers), two of whom were parties to the 2003 agreements. The new agreements, which became effective on January 1, 2007, are for
three-year terms and include a right of renewal by the Deephaven Managers through 2012 under certain circumstances. The new employment agreements provide profit-sharing bonuses based on the financial performance of Deephaven. According to the terms
of the contracts, the Deephaven Managers will receive 50% of the first $60 million, and 75% thereafter, of pre-tax earnings prior to the profit-sharing bonuses. 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



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49% interest in Deephaven (or a new limited liability company 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 provides that in the event of a change of control of the Company following January 1, 2007 and prior to December 31, 2012, the
Deephaven Managers would have the option (the Change of Control Option), in exchange for the termination of their new employment contracts and associated profit-sharing bonuses, to obtain a 51% interest in Deephaven or, if the Option has
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 will be allocated between Knight and the Deephaven Managers in the same manner as under the new employment agreements. During the life of the Option, the agreements provide that the Company may not sell Deephaven without the approval of the
Deephaven Managers.



12.    Regulatory Charges and
Related Matters



As disclosed in the Companys Form
10-K filing for the year-ended December 31, 2005, and in subsequent SEC filings in May 2006, Deephaven announced that it had concluded a settlement with the SEC in connection with trading activity associated with certain Private Investments in
Public Equities (PIPEs). Without admitting or denying the allegations in the SECs complaint, and as part of the settlement, Deephaven was required to disgorge approximately $2.7 million, pay approximately $343,000 in pre-judgment
interest and pay approximately $2.7 million as a civil penalty. In May 2006, these amounts were paid to the Clerk of the Court. The settlement resolved the matters for which Deephaven received the Wells Notice from the staff of the SEC in
June 2005. In 2005, the Company recorded a total pre-tax charge of $5.7 million relating to this matter. Such charges are included in Regulatory charges and related matters on the Consolidated Statements of Operations. The Company did not
record a tax benefit for the $2.7 million civil penalty portion of this settlement.



On December 16, 2004, Knight Securities L.P., (KSLP, now known as KEM) concluded a settlement with the SEC and NASD (the Settlement). The Settlement resolved the matters for which KSLP
received Wells Notices in March 2004 from the staffs of the SEC and NASD but did not address Wells Notices received by certain former employees of KSLP. The terms of the Settlement provided that KSLP disgorge $41.1 million in institutional trading
profits, and pay approximately $13.2 million in interest and $25.0 million in penalties, for a total of $79.3 million, which is recorded as Regulatory charges and related matters on the Consolidated Statements of Operations. These amounts were paid
in full in the fourth quarter of 2004. The Company did not record a tax benefit for the $25.0 million penalty portion of this settlement.



13.    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,
|                                                                                  |  | 2006                             |       |   | 2005 |   | 2004
|Net income                                                                        |  | $                                | 158.3 |   |      | $ | 66.4 |  | $ | 91.1
|Other comprehensive income, net of tax:                                           |  |                                  |       |   |      |   |      |  |   |     
|Net unrealized gains on investment securities held as available-for-sale          |  |                                  |      |   |      |   | 10.4 |  |   |    
|Realization of gains on sales of investment securities held as available-for-sale |  |                                  | (10.4 | ) |      |   |     |  |   |    
|                                                                                  |  |                                  |       |   |      |   |      |  |   |     
|Total comprehensive income, net of tax                                            |  | $                                | 148.0 |   |      | $ | 76.7 |  | $ | 91.1
|                                                                                  |  |                                  |       |   |      |   |      |  |   |     



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.



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14.    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 awards such as stock options and
restricted stock were exercised or converted into common stock.



The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for 2006, 2005 and 2004 (in millions, except per share data):



|                                               |  |                                  |       |                    |   |                      |  |                    |      |                      |   |                    |  |   |      |  |   |      
|---------------------------------------------- |  | -------------------------------- | ----- | ------------------ | - | -------------------- |  | ------------------ | ---- | -------------------- | - | ------------------ |  | - | ---- |  | - | -----
|                                               |  | For the years ended December 31,
|                                               |  | 2006                             |       | 2005               |   | 2004                
|                                               |  | Numerator/net income             |       | Denominator/shares |   | Numerator/net income |  | Denominator/shares |      | Numerator/net income |   | Denominator/shares
|Income and shares used in basic calculations   |  | $                                | 158.3 |                    |   | 101.4                |  | $                  | 66.4 |                      |   | 103.5              |  | $ | 91.1 |  |   | 112.4
|Effect of dilutive stock based awards          |  |                                  |      |                    |   | 4.8                  |  |                    |     |                      |   | 3.4                |  |   |     |  |   | 5.2  
|                                               |  |                                  |       |                    |   |                      |  |                    |      |                      |   |                    |  |   |      |  |   |      
|Income and shares used in diluted calculations |  | $                                | 158.3 |                    |   | 106.2                |  | $                  | 66.4 |                      |   | 106.9              |  | $ | 91.1 |  |   | 117.6
|                                               |  |                                  |       |                    |   |                      |  |                    |      |                      |   |                    |  |   |      |  |   |      
|Basic earnings per share                       |  |                                  |       |                    | $ | 1.56                 |  |                    |      |                      | $ | 0.64               |  |   |      |  | $ | 0.81 
|                                               |  |                                  |       |                    |   |                      |  |                    |      |                      |   |                    |  |   |      |  |   |      
|Diluted earnings per share                     |  |                                  |       |                    | $ | 1.49                 |  |                    |      |                      | $ | 0.62               |  |   |      |  | $ | 0.77 
|                                               |  |                                  |       |                    |   |                      |  |                    |      |                      |   |                    |  |   |      |  |   |      



15.    Employee
Benefit Plan



The Company sponsors 401(k) profit sharing
plans (the Plans) in which substantially all of its employees are eligible to participate. Under the terms of the Plans, the Company is required to make annual contributions to the Plans 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 Plans and included in Employee compensation and benefits on the Consolidated Statements of Operations, was as follows (in millions):



|                                     |  |   |    
|------------------------------------ |  | - | ---
|For the year ended December 31, 2006 |  | $ | 4.1
|For the year ended December 31, 2005 |  |   | 3.3
|For the year ended December 31, 2004 |  |   | 3.5



16.    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 consists of (in millions):



|                     |  |      |       |   |      |   |      |      |  |   |      |  
|-------------------- |  | ---- | ----- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                     |  | 2006 |       |   | 2005 |   |      | 2004 | 
|Current:             |  |      |       |   |      |   |      |      |  |   |      |  
|U.S. federal         |  | $    | 106.6 |   |      | $ | 38.1 |      |  | $ | 15.2 |  
|U.S. state and local |  |      | 7.9   |   |      |   | (2.2 | )    |  |   | 2.6  |  
|Non U.S.             |  |      | 7.4   |   |      |   |     |      |  |   |     |  
|                     |  |      |       |   |      |   |      |      |  |   |      |  
|                     |  |      | 121.9 |   |      |   | 35.9 |      |  |   | 17.8 |  
|                     |  |      |       |   |      |   |      |      |  |   |      |  
|Deferred:            |  |      |       |   |      |   |      |      |  |   |      |  
|U.S. federal         |  |      | (27.0 | ) |      |   | 1.3  |      |  |   | (6.5 | )
|U.S. state and local |  |      | 3.2   |   |      |   | 1.7  |      |  |   | (2.0 | )
|Non U.S.             |  |      | 0.1   |   |      |   |     |      |  |   |     |  
|                     |  |      |       |   |      |   |      |      |  |   |      |  
|                     |  |      | (23.7 | ) |      |   | 3.0  |      |  |   | (8.5 | )
|                     |  |      |       |   |      |   |      |      |  |   |      |  
|Income tax expense   |  | $    | 98.2  |   |      | $ | 38.9 |      |  | $ | 9.3  |  
|                     |  |      |       |   |      |   |      |      |  |   |      |  



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The preceding table does not reflect the tax effects of unrealized gains on available for sale
securities, which are 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 (benefit) at the U.S.
federal statutory rate to the Companys Income tax expense (in millions):



|                                                                                         |  |      |      |      |   |      |      |  |   |      |  
|---------------------------------------------------------------------------------------- |  | ---- | ---- | ---- | - | ---- | ---- |  | - | ---- | -
|                                                                                         |  | 2006 |      | 2005 |   |      | 2004 | 
|U.S. federal income tax expense (benefit) at statutory rate                              |  | $    | 89.8 |      | $ | 36.8 |      |  | $ | (0.2 | )
|U.S. state and local income tax expense (benefit), net of U.S. federal income tax effect |  |      | 7.2  |      |   | (0.3 | )    |  |   | 0.3  |  
|Nondeductible charges                                                                    |  |      | 0.5  |      |   | 1.5  |      |  |   | 9.6  |  
|Other, net                                                                               |  |      | 0.7  |      |   | 0.9  |      |  |   | (0.4 | )
|                                                                                         |  |      |      |      |   |      |      |  |   |      |  
|Income tax expense                                                                       |  | $    | 98.2 |      | $ | 38.9 |      |  | $ | 9.3  |  
|                                                                                         |  |      |      |      |   |      |      |  |   |      |  



Included within
Nondeductible charges in the above table are the effects of the $2.7 million and $25.0 million penalties in 2005 and 2004, respectively, related to the regulatory charges described in Footnote 12, for which no tax benefits were recorded.



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, 2006, 2005 and 2004 are as follows (in millions):



|                                                              |  |      |       |   |      |   |       |      |  |   |       |  
|------------------------------------------------------------- |  | ---- | ----- | - | ---- | - | ----- | ---- |  | - | ----- | -
|                                                              |  | 2006 |       |   | 2005 |   |       | 2004 | 
|Deferred tax assets:                                          |  |      |       |   |      |   |       |      |  |   |       |  
|Employee compensation and benefit plans                       |  | $    | 31.6  |   |      | $ | 14.8  |      |  | $ | 13.1  |  
|Fixed assets and other amortizable assets                     |  |      | 2.8   |   |      |   | 3.3   |      |  |   | 9.7   |  
|Reserves                                                      |  |      | 9.4   |   |      |   | 8.9   |      |  |   | 8.4   |  
|Valuation of investments                                      |  |      | 2.5   |   |      |   | 0.3   |      |  |   | 2.7   |  
|Net operating loss carryforwards                              |  |      | 42.6  |   |      |   | 30.8  |      |  |   | 30.4  |  
|Less: Valuation allowance on net operating loss carryforwards |  |      | (41.9 | ) |      |   | (27.8 | )    |  |   | (27.1 | )
|                                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Total Deferred tax assets                                     |  |      | 47.0  |   |      |   | 30.3  |      |  |   | 37.2  |  
|                                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Deferred tax liabilities:                                     |  |      |       |   |      |   |       |      |  |   |       |  
|Fixed assets and other amortizable assets                     |  |      | 13.3  |   |      |   |      |      |  |   |      |  
|Valuation of investments                                      |  |      |      |   |      |   | 14.1  |      |  |   | 10.9  |  
|                                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Total deferred tax liabilities                                |  |      | 13.3  |   |      |   | 14.1  |      |  |   | 10.9  |  
|                                                              |  |      |       |   |      |   |       |      |  |   |       |  
|Net deferred tax assets                                       |  | $    | 33.7  |   |      | $ | 16.2  |      |  | $ | 26.3  |  
|                                                              |  |      |       |   |      |   |       |      |  |   |       |  



At December 31,
2006, the Company had U.S. federal net operating loss carryforwards, resulting from acquisitions, of $35 million. The Company recorded a related deferred income tax asset of $12 million as of December 31, 2006, and an offsetting valuation
allowance as substantially all of 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, 2006, the Company had state net operating loss
carryforwards of $71 million of which $32 million resulted from acquisitions. The Company recorded a related deferred income tax asset of $4 million as of December 31, 2006, and an offsetting valuation allowance of $3 million for those net
operating loss



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carryforwards considered more likely than not to expire unutilized. Certain of these carryforwards are subject to annual limitations on utilization and they
will begin to expire in 2011.



At December 31, 2006, the
Company had U.K. net operating loss carryforwards of $89 million. The Company recorded a related deferred income tax asset of $27 million as of December 31, 2006, and an offsetting valuation allowance as these net operating loss
carryforwards are considered more likely than not to expire unutilized. These net operating losses may be carried forward indefinitely.



17.    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 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 and the Stock Plans
also 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, 2006, the Company has not issued any stock appreciation rights or
restricted stock units.



Restricted Shares



Eligible employees receive restricted shares as a portion of their total
compensation. Restricted share awards generally vest ratably over three years. The Company has the right to fully vest employees in their awards upon retirement and in certain other circumstances. Awards are otherwise canceled if employment is
terminated before the end of the relevant vesting period.



The
Company measures compensation cost related to restricted shares based on the market 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 date prior to the
grant date. In 2006, 2005 and 2004, the Company recorded compensation expense relating to restricted shares of $14.0 million, $13.4 million and $9.2 million, respectively, all 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 shares was $5.6 million, $5.4 million and $3.7 million in 2006, 2005 and 2004, respectively.



The following table summarizes restricted share activity in
2006 (shares in thousands):



|                           |  |                           |   |  |                                      |      
|-------------------------- |  | ------------------------- | - |  | ------------------------------------ | -----
|                           |  | Number ofRestrictedShares |   |  | Weighted-AverageGrant dateFair Value
|Outstanding at January 1   |  | 3,026.7                   |   |  | $                                    | 10.31
|Granted                    |  | 1,093.9                   |   |  |                                      | 13.42
|Vested                     |  | (995.7                    | ) |  |                                      | 10.25
|Surrendered                |  | (413.8                    | ) |  |                                      | 10.54
|                           |  |                           |   |  |                                      |      
|Outstanding at December 31 |  | 2,711.1                   |   |  | $                                    | 11.55
|                           |  |                           |   |  |                                      |      



The weighted-average
fair value of restricted shares granted in 2006, 2005 and 2004 was $13.42, $9.80 and $13.22, respectively. Based upon the value at date of vest, the cumulative fair value of restricted shares that vested in 2006, 2005 and 2004 was $13.3 million,
$9.7 million and $12.3 million, respectively.



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There is $17.6 million of unamortized compensation related to the unvested restricted shares outstanding
at December 31, 2006. The cost of these unvested restricted shares is expected to be recognized over a weighted average life of 1.4 years.



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 date 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 awards upon retirement and in certain other circumstances. Awards 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
2006, 2005 and 2004 was $4.63, $4.03 and $4.57, respectively. The weighted-average assumptions used were as follows:



|                         |  |      |   |  |      |   |  |      |  
|------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                         |  | 2006 |   |  | 2005 |   |  | 2004 |  
|Dividend yield           |  | 0.0  | % |  | 0.0  | % |  | 0.0  | %
|Expected volatility      |  | 40.0 | % |  | 40.0 | % |  | 40.0 | %
|Risk-free interest rate  |  | 4.7  | % |  | 3.5  | % |  | 3.8  | %
|Expected life (in years) |  | 3.5  |   |  | 3.5  |   |  | 4.0  |  



In 2006, the Company
recorded compensation expense relating to options of $6.8 million, 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 $2.7 million in 2006.



The following table summarizes stock option activity and stock option exercisable in 2006 (options in millions):



|                                                  |  |                  |   |  |                               |       |                                      |   |                                       |  |     
|------------------------------------------------- |  | ---------------- | - |  | ----------------------------- | ----- | ------------------------------------ | - | ------------------------------------- |  | ----
|                                                  |  | Number ofOptions |   |  | Weighted-AverageExercisePrice |       | AggregateIntrinsicValue(in millions) |   | Weighted-AverageRemainingLife (years)
|Outstanding at January 1, 2006                    |  | 13.3             |   |  | $                             | 8.26  |                                      |   |                                       |  |     
|Granted at market value                           |  | 1.2              |   |  |                               | 13.24 |                                      |   |                                       |  |     
|Exercised                                         |  | (4.5             | ) |  |                               | 5.92  |                                      |   |                                       |  |     
|Surrendered                                       |  | (1.1             | ) |  |                               | 13.80 |                                      |   |                                       |  |     
|                                                  |  |                  |   |  |                               |       |                                      |   |                                       |  |     
|Outstanding at December 31, 2006                  |  | 8.8              |   |  | $                             | 9.43  |                                      | $ | 88.0                                  |  | 4.72
|                                                  |  |                  |   |  |                               |       |                                      |   |                                       |  |     
|Vested at December 31, 2006                       |  | 5.4              |   |  | $                             | 8.61  |                                      |   | 62.8                                  |  | 2.94
|                                                  |  |                  |   |  |                               |       |                                      |   |                                       |  |     
|Available for future grants at December 31, 2006* |  | 14.0             |   |  |                               |       |                                      |   |                                       |  |     
|                                                  |  |                  |   |  |                               |       |                                      |   |                                       |  |     

---

*  -  represents both options and
awards available for grant



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|                         |  |                        |  |                                          |  |                               |       |                              |     |                               |   |      
|------------------------ |  | ---------------------- |  | ---------------------------------------- |  | ----------------------------- | ----- | ---------------------------- | --- | ----------------------------- | - | -----
|                         |  | Options Outstanding    |  | Options Exercisable                     
|Range of Exercise Prices |  | Outstandingat 12/31/06 |  | Weighted-AverageRemainingContractualLife |  | Weighted-AverageExercisePrice |       | NumberExercisableat 12/31/06 |     | Weighted-AverageExercisePrice
|$  4.17-$5.61            |  | 1.3                    |  | 1.69                                     |  | $                             | 4.57  |                              | 1.3 |                               | $ | 4.57 
|$  5.97-$6.84            |  | 2.0                    |  | 0.81                                     |  |                               | 6.03  |                              | 2.0 |                               |   | 6.03 
|$  7.25-$9.21            |  | 1.4                    |  | 6.60                                     |  |                               | 8.20  |                              | 0.7 |                               |   | 7.89 
|$  9.52-$10.24           |  | 2.5                    |  | 7.41                                     |  |                               | 10.02 |                              | 0.8 |                               |   | 10.16
|$10.30-$37.43            |  | 1.5                    |  | 7.45                                     |  |                               | 16.05 |                              | 0.6 |                               |   | 8.91 
|$39.84-$71.38            |  | 0.1                    |  | 2.24                                     |  |                               | 59.73 |                              | 0.1 |                               |   | 59.73



The total intrinsic
value of options exercised in 2006, 2005 and 2004 was $46.1 million, $15.9 million and $23.0 million, respectively. Cash received from the exercise of stock options in 2006 totaled $26.8 million.



There is $6.7 million of unrecognized compensation related to the unvested
stock options outstanding at December 31, 2006. The cost of these unvested awards is expected to be recognized over a weighted average life of 1.4 years.



18.    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 agreement 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 brokers and all counterparties with which it conducts business.



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.



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



19.    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. Additionally, the Companys foreign registered broker-dealers are subject to capital adequacy requirements of their respective regulatory authorities. As of December 31, 2006, the Companys significant broker-dealer
subsidiaries, KEM, KCM, KEMIL and Direct Trading, were all in compliance with their capital adequacy requirements. The following table sets forth the net capital levels and requirements for the following significant regulated broker-dealer
subsidiaries at December 31, 2006 as filed in their respective regulatory filings (in millions):



|               |  |             |      |                        |   |                  |  |   |     
|-------------- |  | ----------- | ---- | ---------------------- | - | ---------------- |  | - | ----
|Entity         |  | Net Capital |      | Net CapitalRequirement |   | ExcessNetCapital
|KEM            |  | $           | 80.4 |                        | $ | 7.0              |  | $ | 73.4
|KCM            |  |             | 51.4 |                        |   | 1.0              |  |   | 50.4
|KEMIL          |  |             | 22.1 |                        |   | 8.0              |  |   | 14.1
|Direct Trading |  |             | 11.0 |                        |   | 0.4              |  |   | 10.6



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20.    Business Segments



The Company currently has two operating business segments, Asset Management and Global Markets as well as a Corporate
segment. The Asset Management segment consists of investment management and sponsorship of the Deephaven Funds. The Global Markets segment offers superior execution quality through natural liquidity, capital facilitation and trading technology, with
comprehensive products and services that support the capital formation process. The Corporate segment includes all corporate overhead expenses and investment income earned on strategic investments and the Companys corporate investment in the
Deephaven Funds. 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.



In 2004, the Company sold one of its business segments, Derivative Markets. The revenues and expenses associated with Derivative Markets have been
included within Income from discontinued operations, net of tax on the Consolidated Statements of Operations for all periods presented. For a discussion of discontinued operations, see Footnote 9, Discontinued Operations.



The Companys revenues, income (loss) from continuing operations before
income taxes and total assets by segment are summarized below (amounts in millions).



|                                                              |  |                 |       |               |   |         |           |  |   |                   |   |  |   |         |  
|------------------------------------------------------------- |  | --------------- | ----- | ------------- | - | ------- | --------- |  | - | ----------------- | - |  | - | ------- | -
|                                                              |  | AssetManagement |       | GlobalMarkets |   |         | Corporate |  |   | ConsolidatedTotal |  
|For the year ended December 31, 2006:                         |  |                 |       |               |   |         |           |  |   |                   |   |  |   |         |  
|Revenues                                                      |  | $               | 214.9 |               | $ | 669.7   |           |  | $ | 66.6              |   |  | $ | 951.2   |  
|Income from continuing operations before income taxes1        |  |                 | 74.8  |               |   | 150.3   |           |  |   | 31.4              |   |  |   | 256.5   |  
|Total assets                                                  |  |                 | 199.1 |               |   | 1,670.3 |           |  |   | 158.8             |   |  |   | 2,028.2 |  
|For the year ended December 31, 2005:                         |  |                 |       |               |   |         |           |  |   |                   |   |  |   |         |  
|Revenues                                                      |  | $               | 89.8  |               | $ | 470.7   |           |  | $ | 74.2              |   |  | $ | 634.6   |  
|Income from continuing operations before income taxes2        |  |                 | 20.8  |               |   | 35.1    |           |  |   | 49.3              |   |  |   | 105.2   |  
|Total assets                                                  |  |                 | 82.4  |               |   | 996.1   |           |  |   | 337.5             |   |  |   | 1,416.0 |  
|For the year ended December 31, 2004:                         |  |                 |       |               |   |         |           |  |   |                   |   |  |   |         |  
|Revenues                                                      |  | $               | 78.2  |               | $ | 531.0   |           |  | $ | 16.6              |   |  | $ | 625.8   |  
|Income (loss) from continuing operations before income taxes3 |  |                 | 29.6  |               |   | (13.2   | )         |  |   | (16.9             | ) |  |   | (0.5    | )
|Total assets                                                  |  |                 | 76.8  |               |   | 797.9   |           |  |   | 519.3             |   |  |   | 1,394.0 |  

---

1-  Global Markets segment includes $8.5 million in Writedown of assets and lease loss accrual for the year ended December 31, 2006
(described in Footnote 8).

2-  Global Markets segment includes $10.1 million in Writedown of assets and lease loss accrual (described in Footnote 8) and
Asset Management segment includes $5.7 million in Regulatory charges and related matters (described in Footnote 12) for the year ended December 31, 2005.

3-  Global Markets segment includes $3.8 million in Writedown of assets and lease loss accrual (described in Footnote 8) and $79.3 million
in Regulatory charges and related matters (described in Footnote 12) for the year ended December 31, 2004.



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21.    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 31,2006 |               | December 31,2005
|Assets                                                                                                      |  |                  |               |                  |   |              
|Cash and cash equivalents                                                                                   |  | $                | 4,906,759     |                  | $ | 19,631,035   
|Securities owned, at market value                                                                           |  |                  | 6,342,924     |                  |   | 8,355,588    
|Investments in subsidiaries, equity method                                                                  |  |                  | 908,407,274   |                  |   | 844,461,203  
|Fixed assets and leasehold improvements, at cost, less accumulated depreciation and amortization of $31,077 |  |                  | 278,747       |                  |   |             
|Investments in Deephaven sponsored funds                                                                    |  |                  | 110,918,739   |                  |   | 116,515,653  
|Strategic investments                                                                                       |  |                  | 49,049,520    |                  |   | 11,418,453   
|Other assets                                                                                                |  |                  | 22,029,844    |                  |   | 18,960,399   
|                                                                                                            |  |                  |               |                  |   |              
|Total assets                                                                                                |  | $                | 1,101,933,807 |                  | $ | 1,019,342,331
|                                                                                                            |  |                  |               |                  |   |              
|Liabilities and Stockholders Equity                                                                        |  |                  |               |                  |   |              
|Liabilities                                                                                                 |  |                  |               |                  |   |              
|Accrued compensation expense                                                                                |  | $                | 21,313,580    |                  | $ | 12,907,113   
|Accrued expenses and other liabilities                                                                      |  |                  | 3,173,229     |                  |   | 2,605,237    
|Payable to subsidiaries                                                                                     |  |                  | 95,797,757    |                  |   | 155,473,111  
|Income taxes payable                                                                                        |  |                  | 19,162,297    |                  |   | 24,908,721   
|                                                                                                            |  |                  |               |                  |   |              
|Total liabilities                                                                                           |  |                  | 139,446,863   |                  |   | 195,894,182  
|Total stockholders equity                                                                                  |  |                  | 962,486,944   |                  |   | 823,448,149  
|                                                                                                            |  |                  |               |                  |   |              
|Total liabilities and stockholders equity                                                                  |  | $                | 1,101,933,807 |                  | $ | 1,019,342,331
|                                                                                                            |  |                  |               |                  |   |              



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



Statements of Operations



Knight Capital Group, Inc. (parent only)





|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  
|----------------------------------------------------------------- |  | -------------------------------- | ----------- | ---- | - | ---------- | ---- |  | - | ---------- | -
|                                                                  |  | For the years ended December 31, |            
|                                                                  |  | 2006                             |             | 2005 |   |            | 2004 | 
|Revenues                                                          | 
|Corporate management fees                                         |  | $                                | 28,000,000  |      | $ | 24,260,604 |      |  | $ | 29,445,158 |  
|Investment income and other                                       |  |                                  | 14,694,424  |      |   | 8,635,792  |      |  |   | 7,359,866  |  
|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  
|Total revenues                                                    |  |                                  | 42,694,424  |      |   | 32,896,396 |      |  |   | 36,805,024 |  
|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  
|Expenses                                                          | 
|Compensation expense                                              |  |                                  | 20,915,114  |      |   | 14,326,736 |      |  |   | 22,175,453 |  
|Professional fees                                                 |  |                                  | 10,161,684  |      |   | 6,512,269  |      |  |   | 4,873,597  |  
|Business development                                              |  |                                  | 596,968     |      |   | 460,384    |      |  |   | 2,001,365  |  
|Other                                                             |  |                                  | 3,784,959   |      |   | 4,792,445  |      |  |   | 4,498,769  |  
|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  
|Total expenses                                                    |  |                                  | 35,458,725  |      |   | 26,091,834 |      |  |   | 33,549,184 |  
|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  
|Income before income taxes and equity in earnings of subsidiaries |  |                                  | 7,235,699   |      |   | 6,804,562  |      |  |   | 3,255,840  |  
|Income tax expense (benefit)                                      |  |                                  | 444,393     |      |   | (1,033,254 | )    |  |   | (352,358   | )
|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  
|Income before equity in earnings of subsidiaries                  |  |                                  | 6,791,306   |      |   | 7,837,816  |      |  |   | 3,608,198  |  
|Equity in earnings of subsidiaries                                |  |                                  | 151,554,328 |      |   | 58,523,089 |      |  |   | 87,523,708 |  
|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  
|Net income                                                        |  | $                                | 158,345,634 |      | $ | 66,360,905 |      |  | $ | 91,131,906 |  
|                                                                  |  |                                  |             |      |   |            |      |  |   |            |  



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



73



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##### Table of Contents

Statements of Cash Flows



Knight Capital Group, Inc. (parent only)



|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|-------------------------------------------------------------------------------- |  | ------------------------------- | ------------ | - | ---- | - | ------------ | ---- |  | - | ----------- | -
|                                                                                 |  | For the year ended December 31, |             
|                                                                                 |  | 2006                            |              |   | 2005 |   |              | 2004 | 
|Cash flows from operating activities                                             |  |                                 |              |   |      |   |              |      |  |   |             |  
|Net income                                                                       |  | $                               | 158,345,634  |   |      | $ | 66,360,905   |      |  | $ | 91,131,906  |  
|Adjustments to reconcile net income to net cash provided by operating activities |  |                                 |              |   |      |   |              |      |  |   |             |  
|Equity in earnings of subsidiaries                                               |  |                                 | (151,554,328 | ) |      |   | (58,523,089  | )    |  |   | (87,523,708 | )
|Depreciation and amortization                                                    |  |                                 | 71,077       |   |      |   | 40,000       |      |  |   | 23,333      |  
|Stock-based compensation                                                         |  |                                 | 3,998,277    |   |      |   | 2,850,848    |      |  |   | 2,932,288   |  
|Income tax benefit on stock awards exercised                                     |  |                                 |             |   |      |   | 6,625,852    |      |  |   | 11,392,768  |  
|Appreciation on investments in Deephaven sponsored funds                         |  |                                 | (12,668,808  | ) |      |   | (6,848,912   | )    |  |   | (3,499,375  | )
|Unrealized loss on strategic investments                                         |  |                                 | 1,118,933    |   |      |   | 747,993      |      |  |   | 155,267     |  
|(Increase) decrease in operating assets                                          |  |                                 |              |   |      |   |              |      |  |   |             |  
|Securities owned                                                                 |  |                                 | 2,012,664    |   |      |   | 540,154      |      |  |   | 2,250,099   |  
|Receivable from subsidiaries                                                     |  |                                 |             |   |      |   |             |      |  |   | 45,627,072  |  
|Income taxes receivable                                                          |  |                                 |             |   |      |   |             |      |  |   |            |  
|Other assets                                                                     |  |                                 | (3,790,491   | ) |      |   | 9,319,551    |      |  |   | (28,144,909 | )
|Increase (decrease) in operating liabilities                                     |  |                                 |              |   |      |   |              |      |  |   |             |  
|Accrued compensation expense                                                     |  |                                 | 8,406,467    |   |      |   | (8,516,180   | )    |  |   | 7,951,750   |  
|Accrued expenses and other liabilities                                           |  |                                 | 567,992      |   |      |   | 65,588       |      |  |   | 256,199     |  
|Payable to subsidiaries                                                          |  |                                 | 20,296,276   |   |      |   | 102,509,028  |      |  |   | 54,370,363  |  
|Income taxes payable                                                             |  |                                 | (5,746,424   | ) |      |   | (21,205,732  | )    |  |   | 36,992,313  |  
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Net cash provided by operating activities                                        |  |                                 | 21,057,269   |   |      |   | 93,966,006   |      |  |   | 133,915,366 |  
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Cash flows from investing activities                                             |  |                                 |              |   |      |   |              |      |  |   |             |  
|Purchases of fixed assets and leasehold improvements                             |  |                                 | (309,824     | ) |      |   |             |      |  |   |            |  
|Redemptions of Deephaven sponsored funds                                         |  |                                 | 19,575,433   |   |      |   | 5,000,000    |      |  |   |            |  
|Investments in Deephaven sponsored funds                                         |  |                                 | (1,309,711   | ) |      |   | (55,000,000  | )    |  |   | (20,000,000 | )
|Proceeds from sale of strategic investments                                      |  |                                 |             |   |      |   | 1,165,624    |      |  |   |            |  
|Purchases of strategic investments                                               |  |                                 | (38,750,000  | ) |      |   | (3,650,000   | )    |  |   | (7,080,000  | )
|Dividends received from subsidiaries                                             |  |                                 | 250,514,220  |   |      |   | 38,994,784   |      |  |   | 138,349,426 |  
|Capital contributions to subsidiaries                                            |  |                                 | (235,734,872 | ) |      |   | (143,848,737 | )    |  |   | (13,512,219 | )
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Net cash (used in) provided by investing activities                              |  |                                 | (6,014,754   | ) |      |   | (157,338,329 | )    |  |   | 97,757,207  |  
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Cash flows from financing activities                                             |  |                                 |              |   |      |   |              |      |  |   |             |  
|Stock options exercised                                                          |  |                                 | 26,787,459   |   |      |   | 22,516,960   |      |  |   | 27,192,742  |  
|Income tax benefit on stock awards exercised                                     |  |                                 | 19,405,109   |   |      |   |             |      |  |   |            |  
|Cost of common stock repurchased                                                 |  |                                 | (75,959,359  | ) |      |   | (147,016,329 | )    |  |   | (78,841,155 | )
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Net cash used in financing activities                                            |  |                                 | (29,766,791  | ) |      |   | (124,499,369 | )    |  |   | (51,648,413 | )
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|(Decrease) increase in cash and cash equivalents                                 |  |                                 | (14,724,276  | ) |      |   | (187,871,692 | )    |  |   | 180,024,160 |  
|Cash and cash equivalents at beginning of the year                               |  |                                 | 19,631,035   |   |      |   | 207,502,727  |      |  |   | 27,478,567  |  
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Cash and cash equivalents at end of the year                                     |  | $                               | 4,906,759    |   |      | $ | 19,631,035   |      |  | $ | 207,502,727 |  
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Supplemental disclosure of cash flow information:                                |  |                                 |              |   |      |   |              |      |  |   |             |  
|Cash paid for interest                                                           |  | $                               | 408,493      |   |      | $ | 576,361      |      |  | $ | 189,241     |  
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  
|Cash paid for income taxes                                                       |  | $                               | 102,746,795  |   |      | $ | 52,563,496   |      |  | $ | 26,917,732  |  
|                                                                                 |  |                                 |              |   |      |   |              |      |  |   |             |  



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



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##### Table of Contents

KNIGHT CAPITAL GROUP, INC.

(Parent Only)



NOTES TO CONDENSED FINANCIAL STATEMENTS



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 16, 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 expense included on the Parent Companys Statements of
Operations represents only the income taxes attributable to the Parent Company.



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Item 9.Changes in and Disagreements With Auditors 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 fiscal quarter ended December 31, 2006 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 2007 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).



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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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|2.1                                                     |  | Agreement and Plan of Merger, dated as of November 17, 1999, by and among KT Holding Company, a Delaware corporation, KT Acquisition I Corp., a Delaware corporation, AH Acquisition I L.L.C.,
a Delaware limited liability company, Knight/Trimark Group, Inc., a Delaware corporation, Arbitrade Holdings LLC, a Delaware limited liability company, Tarmachan Capital Management, Inc., Tarmachan Capital Co., Deephaven, Inc., Gildor Trading, Inc.,
Irvin Kessler, Efraim Gildor, Peter Hajas, Merrill Ferguson and Mark Lyons, as amended by Amendment Number One thereto on December 14, 1999 (without exhibits). (Incorporated herein by reference to Exhibit 2.1 to Knights Current Report on Form
8-K (Commission file number 001-14223), dated January 6, 2000).
|                                                        | 
|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                                                     |  | 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                                                    |  | Lease Agreement between Newport L.P.-I, Inc. and Knight Securities, L.P. dated December 6, 1994 (the Knight Lease Agreement) for office space situated in Newport Office Tower, 525
Washington Boulevard, Jersey City, New Jersey 07310. (Incorporated herein by reference to Exhibit 10.3 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                                                    |  | Amendment to the Knight Lease Agreement, dated May 28, 1996. (Incorporated herein by reference to Exhibit 10.4 to Amendment 1 to the Registration Statement on Form S-1 (Registration number
333-51653), filed with the SEC on May 22, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               



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|                                                        |  |                                                                                                                                                                                                                                                                                                                                                                             
|------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                                                                                                                                                                     
|10.3                                                    |  | Second Amendment to the Knight Lease Agreement, dated September 30, 1997. (Incorporated herein by reference to Exhibit 10.5 to Amendment 1 to the Registration Statement on Form S-1
(Registration number 333-51653), filed with the SEC on May 22, 1998).                                                                                                                  
|                                                        | 
|10.4                                                    |  | Third Amendment to the Knight Lease Agreement, dated March 18, 1998. (Incorporated herein by reference to Exhibit 10.6 to Amendment 1 to the Registration Statement on Form S-1 (Registration
number 333-51653), filed with the SEC on May 22, 1998).                                                                                                                       
|                                                        | 
|10.5                                                    |  | Lease Agreement between Nestle USA, Inc. and Trimark Securities L.P., dated March 20, 1996, for the office space situated at 100 Manhattanville Road, Purchase, New York 10577.
(Incorporated herein by reference to Exhibit 10.7 to Amendment 1 to the Registration Statement on Form S-1 (Registration number 333-51653), filed with the SEC on May 22, 1998).            
|                                                        | 
|10.6                                                    |  | 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)                                                                          
|                                                        | 
|10.7                                                    |  | Master Program Product License Agreement between TCAM Systems, Inc. and Trimark Securities, Inc. dated May 1, 1990. (Incorporated herein by reference to Exhibit 10.9 to Amendment 1 to the
Registration Statement on Form S-1 (Registration number 333-51653), filed with the SEC on May 22, 1998).                                                                        
|                                                        | 
|10.8*                                                   |  | 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).                                                                                                                                       
|                                                        | 
|10.9*                                                   |  | 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).                                                                                                                         
|                                                        | 
|10.10                                                   |  | Form of Contribution Agreement. (Incorporated herein by reference to Exhibit 10.19 to Amendment 6 to the Registration Statement on Form S-1 (Registration number 333-51653), filed with the SEC
on July 6, 1998).                                                                                                                                                           
|                                                        | 
|10.11                                                   |  | 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).                                                      
|                                                        | 
|10.12                                                   |  | 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).                                                                                                                              
|                                                        | 
|10.13                                                   |  | 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).



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|                                                        |  |                                                                                                                                                                                                                                                                                                                                                                     
|------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                                                                                                                                                             
|10.14                                                   |  | Form of Indemnification Contract entered into by 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).                                                                                                        
|                                                        | 
|10.15*                                                  |  | Separation and Release Agreement, dated June 11, 2003, between Anthony M. Sanfilippo and Knight Capital Group, Inc. (Incorporated herein by reference to Exhibit 10.27 to Knights
Quarterly Report on Form 10-Q (Commission file number 001-14223), for the quarter ended June 30, 2003).                                                                          
|                                                        | 
|10.16*                                                  |  | 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).                                                                                                                            
|                                                        | 
|10.17*                                                  |  | Employment Agreement, dated as of May 30, 2002, between Thomas M. Joyce and Knight Capital Group, Inc. (Incorporated herein by reference to Exhibit 10.01 to Knights Quarterly Report on
Form 10-Q (Commission file number 001-14223), for the quarter ended June 30, 2002).                                                                                       
|                                                        | 
|10.18                                                   |  | 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).                                                                                                                                                                
|                                                        | 
|10.19                                                   |  | 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).                                                                                                                                                                
|                                                        | 
|10.20                                                   |  | Option Agreement among Deephaven Holdings, LLC, Deephaven Capital Management, LLC, Knight Capital Group, Inc., KFP Holdings I LLC, Colin Smith, Matthew Halbower and Shailesh Vasundhra, dated
October 21, 2003 (Incorporated herein by reference to Exhibit 10.20 to Knights Annual Report on Form 10-K (Commission file number 001-14223), dated March 15, 2005).
|                                                        | 
|10.21*                                                  |  | 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).                                                                                                                                
|                                                        | 
|10.22*                                                  |  | 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).                                                                                                                                    
|                                                        | 
|10.23*                                                  |  | Amendment to Employment Agreement between Thomas M. Joyce and Knight Capital Group, Inc. (Incorporated herein by reference to Exhibit 99.1 to Knights Current Report on Form 8-K
(Commission file number 001-14223) dated June 2, 2005).                                                                                                                           
|                                                        | 
|10.24*                                                  |  | Separation and Release Agreement between Derek N. Stein 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 September 6, 2005).                                                                                                                       
|                                                        | 
|10.25*                                                  |  | 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).                                                                                             



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|                                                        |  |                                                                                                                                                                                                                                                                                                                                                                           
|------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NUMBER ASSIGNED TO EXHIBIT (I.E. 601 OF REGULATION S-K) |  | DESCRIPTION OF EXHIBITS                                                                                                                                                                                                                                                                                                                                                   
|10.26*                                                  |  | 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).                                                                                                                                
|                                                        | 
|10.27*                                                  |  | 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).                                                                                                                                    
|                                                        | 
|10.28*                                                  |  | 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).
|                                                        | 
|10.29*                                                  |  | 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).                                                                                                                                                            
|                                                        | 
|21.1**                                                  |  | Subsidiaries of the Registrant as of December 31, 2006                                                                                                                                                                                                                                                                                                                    
|                                                        | 
|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.
|-- |  | ---------------



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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 28th day of February, 2007.



|                           |  |                                                  
|-------------------------- |  | -------------------------------------------------
|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 John B. Howard, 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                                                 |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    JOHN B.
HOWARD John B. Howard             |  | Senior Managing Director and Chief Financial Officer (Principal
Financial and Accounting Officer) |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    WILLIAM L.
BOLSTER William L. Bolster     |  | Director                                                                                          |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    CHARLES V.
DOHERTY Charles V. Doherty     |  | Director                                                                                          |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    GARY R.
GRIFFITH Gary R. Griffith         |  | Director                                                                                          |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    ROBERT M.
LAZAROWITZ Robert M. Lazarowitz |  | Director                                                                                          |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    THOMAS C.
LOCKBURNER Thomas C. Lockburner |  | Director                                                                                          |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    JAMES T.
MILDE James T. Milde             |  | Director                                                                                          |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    RODGER O.
RINEY Rodger O. Riney           |  | Director                                                                                          |  | February 28, 2007
|                                                 |  |                                                                                                  
|/s/    LAURIE M.
SHAHON Laurie M. Shahon         |  | Director                                                                                          |  | February 28, 2007



81