exhibit4issuerletter.htm


    Exhibit
      4

    


     

    June
      11,
      2007

    


    


    


    Mr.
      Robert Gasser

    Chief
      Executive Officer and President

    Investment
      Technology Group, Inc.

    380
      Madison Avenue

    New
      York,
      NY 10017

    


    


    


    Dear
      Mr.
      Gasser,

    


    As
      you
      may know, D. E. Shaw Laminar Portfolios, L.L.C. and certain of its affiliates
      (collectively, “we” or the “D. E. Shaw group”) beneficially own approximately
      6.2% of the outstanding shares of Investment Technology Group, Inc. (“ITG” or
      the “Company”).

    


    We
      appreciate you and your management team taking the time to discuss the Company
      and its prospects with us.  Despite the outstanding efforts of ITG’s
      management, which have enabled the business to grow and thrive in an
      ever-dynamic industry, we believe the current share price of ITG fails to
      reflect the true fair value of the Company’s global trading products and
      platforms.

    


    Over
      the
      past 12 months, relevant equity market volumes have increased more than 40%
      and
      the Company’s revenues are up 34%, yet ITG’s share price has declined 17%(1).  Over
      the same period, key equity market indices and the stock prices of related
      companies have increased:  (i) the S&P 500 Index has increased
      20%; (ii) Nasdaq stock (ticker: NDAQ) has increased 22%; and (iii) NYSE stock
      (ticker: NYX) has increased 36%.  As a result, at current market
      prices, which imply a valuation of 6.9x EBITDA, 7.7x EBIT and 12.9x EPS(2),
      the market is
      valuing ITG at a 30-40% discount to the average valuation of comparable
      companies.  This valuation gap persists despite ITG’s continued strong
      growth prospects and defensible competitive position in a growing market volume
      environment.

    
 

    This
      valuation discrepancy is partly attributable to a suboptimal capital structure
      -- specifically ITG’s maintaining a net cash position equal to 10% of its market
      capitalization.  This net cash position depresses ITG’s ROE, which is
      currently 15% vs. comparable companies in the mid-to-high 20%
      range.  This cash could be used for highly accretive share buybacks,
      which would yield far higher returns than what the Company earns on its cash
      balances.  Incremental share buybacks funded with modest leverage
      would also be highly accretive to ITG’s earnings.  Overall, we
      estimate that ITG could increase net debt by $600 million(1)
      to $450 million,
      using balance sheet cash of $250 million and adding incremental debt of $350
      million at a cost of 4.2% post-tax (7.0% pre-tax).  These proceeds
      should be used to repurchase ITG stock, which currently trades at a 7.6% free
      cash flow yield.  Assuming a 10% average buyback premium, a $600
      million share buyback would boost earnings per share in 2008 by approximately
      25%, from $2.79(2)
      to $3.42, and
      would retire approximately 30% of the Company’s current shares
      outstanding.  A buyback of this magnitude would reduce excess balance
      sheet capital and increase ITG’s ROE dramatically from 15% to 45%.

    


    The
      valuation gap also persists because of ITG’s investments, particularly the
      Company’s efforts to expand internationally.  We strongly support
      management’s long-term strategic outlook and enthusiastically endorse its
      investments in new products, asset classes and geographies.  We are
      confident these investments will enrich shareholders
      longer-term.  That said, they are pressuring near-term operating
      margins, causing year-on-year declines in each of the past two
      quarters.  In the fourth quarter of 2006, despite year-on-year revenue
      growth of 37%, ITG’s operating margins declined over 200 basis
      points.  Similarly, in the most recent quarter, ITG’s operating
      margins declined over 150 basis points year-on-year despite revenue growth
      of
      16%.  During your most recent conference call and in our meetings, you
      mentioned that investments in self-clearing in the U.S. as well as several
      infrastructure-related investments for international expansion negatively
      impacted ITG’s margins.  Without this investment spending, you
      mentioned that ITG’s margins would have increased year-on-year.

    


    To
      be
      clear, we are not by any means suggesting that management abandon its long-term
      view and cease making investments in long-term growth
      opportunities.  That said, it is incumbent on the Company’s Board of
      Directors (the “Board”) to take actions to reduce the gap between ITG’s stagnant
      share price and the fair value of its business.  In the current market
      environment, characterized by abundant liquidity in the credit and equity
      markets (which will not last forever), we have seen countless examples of
      strategic and financial buyers paying far higher prices than the public markets
      are willing to pay for long-term investment opportunities.  Based on
      the high regard in which ITG is held among its counterparties, competitors,
      and
      other industry participants, we expect that there is no shortage of buyers
      interested in the Company and its assets.

    


    Accordingly,
      the time is right for the Board to evaluate strategic alternatives to realize
      shareholder value, including a sale of some or all of ITG’s businesses to a
      strategic or financial buyer.  If such a process fails to yield an
      appropriate price, the Board should institute an aggressive share buyback
      program along the lines set forth above.

    


    We
      believe that strategic acquirors, including numerous large financial
      institutions and exchanges, would be very interested in ITG because of the
      significant synergies they could realize from the integration of ITG’s trading
      products and technologies into their current businesses.  While some
      of these institutions would be interested in acquiring all of ITG, others may
      be
      interested in acquiring certain parts of the business (i.e., order management
      system, execution management system, algorithmic trading products, and / or
      crossing systems).  These institutions could also realize significant
      cost savings from placing their current trading volumes onto the acquired ITG
      end-to-end trading platforms, which include pre-trade analytics, trading
      products and services, and post-trade analysis.

    


    Additionally,
      given the strong leveraged buyout and credit markets and the track record of
      private equity investments in this sector (including an investment by two
      private equity firms in Liquidnet and one private equity firm in BNY ConvergEx),
      we believe that numerous financial acquirors would be interested in pursuing
      a
      going-private transaction with ITG.  Notably, as a private company,
      ITG could take on incremental leverage and would have the ability to invest
      in
      longer-term future expansion without being penalized by the market
      today.

    


    A
      merger
      between ITG and another industry participant could also yield material
      synergies.  Potential merger partners include other large participants
      in the off-exchange global trading marketplace.  Highlighted merger
      synergies include (i) rationalizing transaction, telecom, and data processing
      expenses, (ii) meaningfully reducing compensation expense, and (iii)
      consolidating redundant corporate overhead and back office functions and
      locations.  We estimate the total cost synergies from this type of
      combination to be at least $75 million, representing an approximate 35%
      increase in the EBIT contributed from ITG or an approximate 950 basis points
      increase in the EBIT margin contributed from ITG (37% vs. 28%) to a merger
      partner.  Importantly, these cost savings could be achieved while
      retaining most, if not all, of the existing revenues of each stand-alone
      company.  The increased scale and profitability of the pro forma
      merged company would create an even more formidable player relative to the
      exchanges and other companies in this industry.

    


    The
      underperformance of ITG’s stock price and its low valuation, in spite of its
      outstanding business and management performance in a thriving industry gives
      us
      little confidence that ITG shares will appreciate to fair value in a timely
      manner if the Company chooses to remain as a stand-alone public company with
      its
      current capital structure.  Further, we are confident that the
      alternatives discussed could unlock significant value for ITG
      shareholders.

    


    We
      urge
      ITG’s Board of Directors to conduct a thorough evaluation of all strategic
      alternatives available to the Company and are happy to meet with management
      or
      the Board at their respective convenience to discuss the
      foregoing.  Thank you in advance for your continued efforts on behalf
      of ITG shareholders.  We look forward to further
      discussions.

    


    Sincerely,

    


    


    /s/
      Scott
      Henkin                                                      /s/
      Marc
      Sole                                                      
/s/ Mony Rueven

    
      
        
          
            	
                    Scott
                      Henkin

                    D.
                      E. Shaw & Co., L.P.

                  	
                    Marc
                      Sole

                    D.
                      E. Shaw & Co., L.P.

                  	
                    Mony
                      Rueven

                    D.
                      E. Shaw & Co.,
                      L.P.

                  


          

        

      

    

    


    


     

    
 

     

     

      
       
        
          

        

      

      
         (1)
          A $600 million increase in net debt would result in pro forma net debt
          of $450
          million based on the Company’s current net cash position of $150 million
          (pro forma for the RedSky Financial acquisition). Pro forma net debt of
          $450 million equates to leverage of approximately 2x net debt /
          EBITDA.

         

        
          (2)
            EPS of $2.79 for 2008E is based on current analyst consensus estimates
            for
            ITG.