2010 Knight Capital Group, Inc. Annual Report Knight Capital Group, Inc. 2010 Annual Report A Knight Capital Group (NYSE Euronext: KCG) is a global financial services firm that provides access to the capital markets across multiple asset classes to a broad network of clients, including buy- and sell-side firms and corporations. Knight is headquartered in Jersey City, N.J. with a growing global presence across the Americas, Europe and the Asia-Pacific region. For further information about Knight, please visit www.knight.com. OUR CLIENTS BUY-SIDE FIRMS SELL-SIDE FIRMS CORPORATIONS Knight operates a global, multi- Knight is one of the world’s Knight offers an array of services asset class platform for buy-side leading market makers, serving to corporations. The firm is the firms, combining sophisticated sell-side firms by providing largest market maker in thousands electronic trading with sales and liquidity in a broad range of of U.S. equities and serves as trading. The firm’s U.S.-, Europe- securities. The firm engages in a Designated Market Maker on and Asia-based teams engage market making in equities, options the NYSE and NYSE Amex. In in trading across equities, fixed and foreign exchange, and addition, Knight arranges non-deal income, foreign exchange, options provides access to trading in fixed roadshows for undercovered and futures on behalf of mutual income, on behalf of full-service corporate issuers and provides funds, hedge funds, pension funds, and online brokers, private wealth capital markets services to issuers insurance companies, banks, trusts managers, registered investment and private companies. and endowments. advisors, financial advisors, banks and bulge bracket firms. B Knight Capital Group, Inc. 2010 Annual Report Knight Capital Group, Inc. 2010 Annual Report 1 FELLOW KNIGHT SHAREHOLDER: In 2010, we fell short of our own expectations as a divergence in market conditions forestalled a more immediate and robust turnaround in the global capital markets. The protracted economic uncertainty contributed to a decline in retail and institutional trading activity. Average daily share volume of U.S. equities fell 13.2 percent1 year-over-year while average daily dollar volume of U.S. corporate bonds fell 2.5 percent2, with the corresponding spreads narrowing 45–60 percent3. The VIX averaged just 22.6 in 2010, which is well below recent years. In contrast, the Dow Jones Industrial Average, S&P 500 and NASDAQ Composite indexes all registered double-digit gains on the year. Nevertheless, during the course of the year, Knight maintained industry-leading Thomas M. Joyce market share in U.S. equities trade volumes and developed in-house clearing Chairman & CEO capabilities. We addressed the renewed competition in institutional fixed income while adding clients and growing trade volumes in retail fixed income. Knight reported record foreign exchange trade volumes and greatly expanded options market-making and trading capabilities. In addition, we continued to steadily expand the firm’s global presence through London and Hong Kong. FINANCIAL RESULTS While Knight generated positive results in 2010, we are determined to improve performance. On a consolidated basis: • Revenues decreased 1.2% to $1.15 billion in 2010 from $1.16 billion in 2009 • Pre-tax earnings declined 35.6% to $150.0 million in 2010 from $232.8 million in 2009 • Pre-tax margins were 13.1% in 2010 compared to 20.0% in 2009 Pre-tax earnings and margins were impacted by approximately $40 million of investments in clearing, options, global expansion, research and capital markets. B Knight Capital Group, Inc. 2010 Annual Report Knight Capital Group, Inc. 2010 Annual Report 1 We made modest acquisitions in the areas of • Knight Link,® an electronic access point into MBS origination, asset management and Knight’s off-exchange liquidity, increased U.S. market making. Starting in the second quarter equity shares traded by 23.6% of 2010, we began recording an average • At the end of the year, Knight was effectively quarterly interest expense of approximately self-sufficient in terms of clearing U.S. equities $6.4 million on the firm’s convertible debt. which will generate cost savings upon In addition, we took a restructuring charge expiration of our current clearing contract at of $16.7 million in the third quarter of 2010, the close of the first half of 2011 primarily in institutional fixed income, to • Due to recent expansion, Knight ascended reposition staff and resources amid shifts to become the third-largest market maker in the competitive landscape. in U.K. equities • Knight BondPoint,® a fixed income ECN for Considering the market opportunities identified the retail bond market, grew dollar volume in our core market-making and trading businesses, traded by 20.0% we believe we can generate stronger results • Hotspot FX,® an institutional foreign exchange provided a moderate improvement in overall ECN, increased foreign exchange notional U.S. equity market volumes. dollar value traded by 62.0% • Knight completed a simultaneous listing on EXECUTING THE GROWTH STRATEGY the NYSE and NYSE Euronext in Paris under the ticker symbol “KCG” As we begin to emerge from a period of • Knight was ranked 14th on the 2010 aggressive investment, there is much progress InformationWeek 500 list of the top to report in developing Knight’s client offering, technology innovators in the U.S. infrastructure and reputation. • Knight published “Current Perspectives on Modern Equity Markets,” a collection of Among the 2010 highlights: essays by industry luminaries on how • Knight executed greater U.S. equity share innovation, competition and regulation volume of Listed (NYSE), NASDAQ, ADRs, have influenced the U.S. equity markets Bulletin Boards and ETFs than any other • The trading floor in Knight’s Jersey City securities firm4 headquarters was featured prominently • Knight’s market share in ETF trading rose in the Oliver Stone movie “Wall Street: to 20.4% from 14.8% due primarily to Money Never Sleeps” as the fictitious contributions of the institutional listed Keller Zabel Investments derivatives team • Knight Direct,® which offers an execution In addition, we continued to enhance newer management system and client-driven and/or complementary products and services algorithmic strategies, grew U.S. equity during the year. shares traded by 115.3% As we begin to emerge from a period of aggressive investment, there is much progress to report in developing Knight’s client offering, infrastructure and reputation. 2 Knight Capital Group, Inc. 2010 Annual Report The imperative over the coming year is to continue the revenue momentum while improving pre-tax earnings. Knight research worked to build on our SUMMARY capabilities in close cooperation with the institutional equity and fixed income teams. At Knight, we’ve cultivated a sizeable and Our commission management product was diverse client network of leading buy- and rated number one in client service for North sell-side firms. We have a strong core in market America in a leading industry survey. making and trading with additional room for further client and market share gains. Under Capital markets continued to make inroads the growth strategy, we’re rolling out promising with corporate issuers as well as partner with new capabilities that build on the core. mid-size and boutique investment banks to provide distribution across equities and fixed The imperative over the coming year is to income. Corporate access continued to continue the revenue momentum while arrange meetings for corporate issuers with improving pre-tax earnings. Several initiatives large institutional clients. are in the process of shifting from expense items to pre-tax contributors. Following Finally, we reentered asset management an active period for acquisitions, pencils through the acquisition of a growing firm are down as we concentrate on maximizing that utilizes proprietary macro-economic returns. In addition, we are working to models to construct portfolios of ETFs address costs. We will assess market conditions primarily for retail investors. and the competitive landscape to make sure that we are properly resourced. BALANCE SHEET Despite the challenges, I believe Knight and Knight’s financial condition is solid. our employees are poised to accomplish great things. We understand how trading is evolving, At the end of 2010, Knight had $4.7 billion we possess industry-leading trading technology, in assets, approximately 81 percent of which and our interests are aligned with our clients. consisted of cash or assets readily convertible into cash. The majority of the recent growth On behalf of Knight’s directors, management is the result of a ramp-up in clearing, stock team and employees, thank you for your support. loan and principal trading activities. As of the close of the year, Knight had a debt-to-equity ratio of 0.23 and shareholders’ Thomas M. Joyce equity of $1.4 billion, which was equivalent to Chairman & CEO a book value of $14.51 per diluted share. March 17, 2011 1 Source: NYSE, NASDAQ, Arcavision, Barclays Capital 2 Source: FINRA 3 Source: The Yield Book 4 Source: AutEx advertised trade volume for the full year 2010 2 Knight Capital Group, Inc. 2010 Annual Report Knight Capital Group, Inc. 2010 Annual Report 3 Q&A WITH TOM JOYCE HOW IS KNIGHT MANAGING AMID THE MARKET CONDITIONS AND Q: COMPETITIVE ENVIRONMENT IN 2011? Given the generally weak trading activity, we’re making determinations based on the client A: segment and asset class. For example, we are deepening relationships with sell-side clients through fixed income and options. We’re introducing buy-side clients to Knight’s electronic trading capabilities. And the fixed income research team is ramping up reports on undercovered issuers to generate trades from buy-side clients. In short, all of Knight’s product and service teams are staying connected with clients. TO WHAT DO YOU ATTRIBUTE THE STRONG GROWTH OF KNIGHT’S ELECTRONIC Q: TRADING PLATFORMS? We understand how markets function, what buy- and sell-side firms value in the trade A: execution process and where to find opportunities for improvement.