DISCLOSURE OF CONTROL RELATIONSHIP
KCG Holdings, Inc. is comprised of several trading and related entities under common control. Collectively, these businesses and affiliates are referred to as KCG in this disclosure document. For additional information regarding KCG’s affiliates, please refer to Operating Subsidiaries page on KCG.com. KCG affiliates effect transactions in KCG stock (NYSE and NYSE Euronext: KCG).
Securities and futures in the United States are offered by KCG Americas LLC (“KCGA”). KCGA is a member of FINRA, SIPC (website: http://www.sipc.org/; phone: 202-371-8300), NFA and most national securities and futures exchanges and clearinghouses in the United States.
Securities services and proprietary market making activity in the United Kingdom and European Union are offered by KCG Europe Limited (“KCGE”), which is a member of most major European exchanges. Unless governing law permits otherwise, you must contact a KCG entity in your home jurisdiction if you want to use our services to effect a transaction in the securities mentioned in this material.
SECURITIES INVESTOR PROTECTION CORPORATION
Please make note that you can obtain information about SIPC, including the SIPC brochure, by visiting their website www.sipc.org or calling (202) 371-8300.
SECTION 311 NOTICES (PROHIBITED ACCOUNTS)
Pursuant to U.S. regulations issued under section 311 of the USA PATRIOT Act, 31 CFR 103.193, KCG is prohibited from establishing, maintaining, administering or managing a correspondent account for, or on behalf of: Banca Privada d’Andorra, Banco Delta Asia; Burma; Commercial Bank of Syria (Includes Syrian Lebanese Commercial Bank); FBME Bank Ltd., Lebanese Canadian Bank SAL or any of their subsidiaries; Halawi Exchange Co.; Islamic Republic of Iran; JSC CredexBank; Kassem Rmeiti & Co. For Exchange; and Liberty Reserve S.A. Regulations also require us to notify you that you may not provide any of the aforementioned entities or their subsidiaries with access to the account(s) that you hold with us. If we become aware that one of these entities or any of their subsidiaries is indirectly using the account that you hold with us, we will be required to take appropriate steps to prevent such access including, where necessary, terminating your account(s). Updated Section 311 Special Measures can be viewed at:
NOTICE REGARDING PRIVACY AND CONFIDENTIALITY
KCG archives electronic communications pursuant to regulatory requirements and may monitor and review the content of all electronic communications. KCG utilizes third party vendors in the conduct of its business, including third party “cloud” solutions. Client information may reside with those third party vendors.
USE OF ORDER AND TRADE DATA
The Firm may use certain order and execution data (“trade data”) for bona-fide business purposes. For example, the Firm disseminates trade data to “trade advertisement” vendors and to KCGA sales and trading personnel for the purpose of providing market color to clients. In providing market color, KCGA may segment aggregated post trade execution information by symbol, internally aggregated buy or sell imbalances, and client segment (e.g., Retail, Institutional and Algorithmic). The Firm may also use trade data to perform venue and transaction cost analysis and/or capital use analysis. For example, certain business units may perform post-trade analysis of historical order information in order to develop and maintain profiles for clients that KCGA will use to managing liquidity provision and to adjust internalization rates.
This disclosure is intended to illustrate how the Firm uses trade data but does not describe every aspect of how the Firm may use trade data for its business purposes. Please contact your sales representative if you have questions or wish to request that your trade data be excluded.
PAYMENT FOR ORDER FLOW
KCGA may receive remuneration for directing orders to a particular broker or dealer and may route orders to market centers, including national securities exchanges, alternative trading systems, electronic communications networks, and broker-dealers that may offer credits for orders that provide liquidity and may assess fees for orders that take liquidity. In some cases, the credits offered by a market center may exceed the charges assessed, such that a market center may make a payment to KCGA in relation to orders directed to such market center. Such remuneration, if any, is considered compensation to us. The source and amount of any compensation received on behalf of your particular order will be disclosed upon written request.
KCGA will make order routing information on orders you placed through our trading system(s) available to you upon request in compliance with SEC Rule 606. If you would like more information please contact our Client Services Department at (201) 222-9400.
FINRA RULE 5320 DISCLOSURE – ORDER PROTECTION
KCGA is engaged in trading activities in multiple trading units and in various equity securities. As permitted pursuant to FINRA Rule 5320, KCGA has implemented information barrier processes, which are designed to prevent its different trading units from obtaining knowledge of the orders handled by other trading units. KCGA may trade for its own account in one trading unit at a price that would satisfy a client order resting in another KCGA trading unit without providing an execution to that resting client order.
FINRA RULE 5270 DISCLOSURE – BLOCK ORDERS
FINRA Rule 5270 prohibits a broker-dealer from buying or selling a security or a “related financial instrument” for its own account when that member has material, non-public market information concerning an imminent block transaction in that security, a related financial instrument or a security underlying the related financial instrument prior to the time information concerning the block transaction has been made publicly available, or has otherwise become stale or obsolete. However, Rule 5270 does permit certain exceptions, and one of the exceptions allows a broker-dealer to trade for its own account when transactions are undertaken to fulfill or facilitate the execution of the customer block order (including hedging or block positioning).
For example if a client requests that KCGA execute a guaranteed-priced order (“Guaranteed Order”), KCGA will usually establish a hedge through single or multiple purchase (sale) transactions in order to offset the risks associated with facilitating the Guaranteed Order. KCGA will typically establish the hedge before it executes (fills) the client’s Guaranteed Order, and the hedge will usually involve transacting as principal in the same security, however, it may also involve transacting as principal in related derivative and/or financial instruments (e.g., standardized options, futures, exchange traded funds, fixed income securities, etc.). The Firm generally attempts to establish a perfect hedge, but may not always do so under certain circumstances such as natural forces of supply and demand. If the Firm is not able to establish a perfect hedge KCGA may, at its good faith discretion, purchase (sell) a different quantity of shares than the quantity of shares on the Guaranteed Order(s).
Additionally, the final price that is received on your order may be impacted by KCGA’s hedging and positioning activity particularly with regard to thinly-traded stocks or large hedging transactions. For example, if a client places a large Guaranteed Order(s) to purchase/sell a thinly-traded stock, and the Firm enters into related hedge transactions, the Firm’s transactions may contribute to an increase/decrease in the stock’s price, which in turn could increase/decrease the guaranteed price. Moreover, KCGA may be handling other client orders concurrently with your guaranteed order, and may trade principally in connection with the facilitation of these orders, which may affect the final price received on your order. KCGA will make reasonable efforts to balance each of its client’s, and the Firm’s needs, in handling orders and will seek to obtain best execution and fair pricing in each instance.
OPTIONS PROFESSIONAL/PRIORITY CUSTOMER DESIGNATION
Clients must mark all terms of their option orders accurately, including by appending the proper order origin code(s) to each order. This includes, but is not limited to, the correct marking of professional/priority customer orders, or orders for any customer that had an average of more than 390 orders per day during any month of the prior calendar quarter. Further information about this requirement may be found, among other places, in ISE Regulatory Circulars 2014-007, 2011-011 and 2009-06. Please contact your KCG representative with any questions.
OPTIONS SOLICITED ORDER MECHANISM
When handling an order of 500 contracts or more on your behalf, KCGA may solicit other parties to execute against your order and may thereafter execute your order using the International Securities Exchange’s Solicited Order Mechanism. This functionality provides a single-price execution only, so that your entire order may receive a better price after being exposed to the Exchange’s participants, but will not receive partial price improvement. For further details on the operation of this Mechanism, please refer to International Securities Exchange Rule 716, which is available at www.ise.com under “Membership, Rules & Fees – Regulatory – ISE Rules.”
NET TRADING DISCLOSURE
Clients may request that KCGA execute “not held” orders on a “net” basis. When you enter a “not held” order with KCGA, you are giving KCGA discretion to use its professional judgment on the timing and pricing of the executions in order to help ensure that an overall quality execution is provided. In addition, consistent with using its discretion to seek best execution, KCGA is not required to display or protect orders when it trades at prices equal to or better than those of the “not held” orders.
In order to facilitate orders on a “net” basis, KCGA will, after receiving such order, accumulate a position in a principal account and execute the order at the average price of the accumulation plus or minus an agreed upon compensation. Accordingly, the net price you receive will include the compensation that you agreed to pay KCGA. Since the “net” price is the price that is reported by KCGA to the Consolidated Tape, it will appear as the “trade price” on your confirmation. Therefore, the client confirmation will not separately disclose the compensation that KCGA earned on the trade. The actual prices used to facilitate the order(s) are available upon request.
Transactions executed in overseas markets may be effected with an affiliate. If the trade is being settled in a currency different from the standard settlement currency of the traded security, KCG has effected the currency conversion it considered necessary for the purpose of complying with your instructions. KCG may effect currency transactions for its own account at rates that are different than the currency exchange rate applied to your order. Full details regarding the executing entity and the costs associated with the currency conversion when the conversion is executed by a KCG affiliate are available upon written request. Foreign-currency-denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. In addition, clients in securities such as ADRs, the values of which are influenced by foreign currencies, effectively assume currency risk.
KCGA operates the KCG BondPoint ATS (“KBP ATS”). Other divisions and affiliates of KCGA may transmit orders to, and execute transactions on, the KBP ATS in connection with their handling of client orders or for their own account on a proprietary basis. Some prices on KBP ATS are displayed on a net basis which may include remuneration or other fees.
KCGA operates the MatchIt ATS (“MatchIt”). Other divisions of KCGA or KCG affiliates may transmit orders to MatchIt. These other divisions or affiliates may transmit orders to the MatchIt ATS in connection with their handling of client orders or for their own account on a proprietary basis. Additional information about MatchIt, including the MatchIt Execution Protocols and Form ATS, are available at kcg.com/matchit.
Acknowledge is an electronically-enabled offering for equities (Acknowledge EQ), fixed income securities (Acknowledge FI) and foreign exchange (Acknowledge FX). A KCG affiliate trades as principal and is the counter party on all trades. Acknowledge may transmit Indications of Interest (IOIs). Transmission of an order, including transmission in response to an IOI, may not result in a trade. For NMS securities, if Acknowledge fills an order at a premium or discount to the National Best Bid or Offer (“NBBO”), KCGA will send proprietary Inter-market Sweep Orders to other market centers to execute against the “top of book” quotations displayed in order to fulfill its Regulation NMS responsibilities. KCGA may also immediately transmit proprietary orders to liquidate its risk in connection with fulfilling the Block Order. In either instance, KCGA may receive better or worse prices in connection with the proprietary orders sent to other trading venues. For more information about Acknowledge please visit kcg.com/ack.
PRE-MARKET and POST-MARKET EXECUTION RISK
Clients should be aware of the following risks when submitting orders for execution in the pre-market or post market sessions.
Risk of Lower Liquidity. Liquidity refers to the ability of market participants to buy and sell securities. Generally, the more orders that are available in a market, the greater the liquidity. Liquidity is important because with greater liquidity it is easier for investors to buy or sell securities, and as a result, investors are more likely to pay or receive a competitive price for securities purchased or sold. There may be lower liquidity in extended hours trading as compared to regular market hours. As a result, your order may only be partially executed, or not at all.
Risk of Higher Volatility. Volatility refers to the changes in price that securities undergo when trading. Generally, the higher the volatility of a security, the greater its price swings. There may be greater volatility in extended hours trading than in regular market hours. As a result, your order may only be partially executed, or not at all, or you may receive an inferior price in extended hours trading than you would during regular market hours.
Risk of Changing Prices. The prices of securities traded in extended hours trading may not reflect the prices either at the end of regular market hours, or upon the opening of the next morning. As a result, you may receive an inferior price in extended hours trading than you would during regular market hours.
Risk of Unlinked Markets. Depending on the extended hours trading system or the time of day, the prices displayed on a particular extended hours system may not reflect the prices in other concurrently operating extended hours trading systems dealing in the same securities. Accordingly, you may receive an inferior price in one extended hours trading system than you would in another extended hours trading system.
Risk of News Announcements. Normally, issuers make news announcements that may affect the price of their securities after regular market hours. Similarly, important financial information is frequently announced outside of regular market hours. In extended hours trading, these announcements may occur during trading, and if combined with lower liquidity and higher volatility, may cause an exaggerated and unsustainable effect on the price of a security.
Risk of Wider Spreads. The spread refers to the difference in price between what you can buy a security for and what you can sell it for. Lower liquidity and higher volatility in extended hours trading may result in wider than normal spreads for a particular security.
Risk that Current Underlying Index Value or Intraday Indicative Value (“IIV”) is Unavailable. For certain Derivative Securities Products, an updated underlying index value or IIV may not be calculated or publicly disseminated in extended trading hours. Since the underlying index value and IIV are not calculated or widely disseminated during the pre-market and post-market sessions, an investor who is unable to calculate implied values for certain Derivative Securities Products in those sessions may be at a disadvantage to market professionals.
FOR OUR ETF / ETN CLIENTS
Clients should consider the investment objectives, risks, and charges and expenses of the ETFs and ETNs carefully before investing. Each US listed ETF and ETN has filed a registration statement (including a prospectus) with the SEC which contains this and other information about the ETF or ETN as applicable. Before you invest in an ETF or ETN, you should obtain and read carefully the prospectus in the registration statement and other documents the issuer has filed with the SEC (or other relevant international regulatory body) for more complete information about the product. In the US, you may get these documents for free by visiting EDGAR on the SEC website at www.sec.gov.
Alternatively, you may obtain a copy of the prospectus for each of the ETFs and ETNs mentioned in these materials from the issuer or by contacting your sales representative or by calling 800-544-7508. ETFs are redeemable only in creation unit size aggregations and may not be individually redeemed; are redeemable only through authorized participants; and are redeemable on an "in-kind" basis. The public trading price of a redeemable lot of the ETFs may be different from its net asset value. These ETFs can trade at a discount or premium to the net asset value. Leveraged and inverse ETFs have unique risks, including leverage, derivatives, complex investment strategies and compounding risk. Designed for intraday trading, they require active monitoring and management and are not suitable for all investors. For more information, SEC's Alert on Leveraged and Inverse ETFs at http://sec.gov/investor/pubs/leveragedetfs-alert.htm. There is always a fundamental risk of declining stock prices, which can cause losses to your investment.
RESTRICTED AND CONTROL SECURITIES AND REGISTERED OFFERRINGS
Restricted securities are securities acquired in unregistered, private sales from the issuing company or from an affiliate of the issuer. Investors typically receive restricted securities through private placement offerings, Regulation D offerings, employee stock benefit plans, as compensation for professional services, or in exchange for providing "seed money" or start-up capital to the company. SEC Rule 144(a)(3) identifies what sales produce restricted securities.
Control securities are those held by an affiliate of the issuing company. An affiliate is a person, such as an executive officer, a director or large shareholder, in a relationship of control with the issuer. Control means the power to direct the management and policies of the company in question, whether through the ownership of voting securities, by contract, or otherwise. If you buy securities from a controlling person or "affiliate," you acquire restricted securities, even if they were not restricted in the affiliate's hands.
Sales of securities that are offered pursuant to an effective registration statement filed with the Securities and Exchange Commission must be accompanied by or preceded by a registration statement. Under certain conditions, restricted and control securities may be sold to the public.
Unless we expressly agree otherwise in advance of any transaction, it is our expectation that you will not send KCG orders to sell securities that are restricted or control securities or offered pursuant to an effective registration statement such that KCG would be required to deliver a prospectus to its counterparties.
In the event we expressly agree to accept such orders, we will first determine whether can appropriately handle the transaction in compliance with relevant laws and regulations. We will likely contact the issuer, their counsel and the transfer agent and will typically ask you the following types of questions:
How long have you held the securities?
How did you acquire the securities?
Have you recently sold or do you intend to sell additional securities of the same class?
Have you solicited or made arrangements for the solicitation of buyers of your securities or made payments to any other persons in connection with the transactions?
Because securities that are, or at one time were, restricted frequently bear a legend on the certificates that serves to restrict their transfer, clearance and settlement such transactions may be delayed beyond the normal settlement cycle. Under these circumstances, orders may be required to be marked short. Proper marking of such orders will allow for additional time beyond the normal settlement cycle to make delivery, while improperly marked orders put you at risk of being bought-in.
As with all transactions, KCG reserves the right to refuse to accept orders and may cancel trades to the extent we are able if we suspect the transaction involves the types described above and you have not cooperated in informing KCG of the nature of the transactions in advance and provided appropriate information to help us ensure we can handle the transactions in compliance with applicable regulations.
Pursuant to the international dealer registration exemption in NI 31-103, KCGA is informing you of the following:
It is not registered as a dealer in any of Québec, Ontario, British Columbia or Alberta. In each of these provinces, the Firm is trading with you, its client, in reliance upon an exemption from the dealer registration requirement under NI 31-103.
The Firm’s principal place of business is located in New Jersey, U.S.A.
There may be difficulty enforcing legal rights against the Firm because all or substantially all of its assets may be situated outside of Canada.
The name and address of its agent for service of process in the each of the listed provinces is listed below:
Borden Ladner Gervais LLP
Centennial Place, East Tower, 1900, 520 - 3rd Avenue SW
Calgary, Alberta T2P 0R3
Attention: Jon Doll
Borden Ladner Gervais LLP
1200 Waterfront Centre, 200 Burrard Street
P.O. Box 48600
Vancouver, B.C. V7X 1T2
Attention: Shantela Blaeser
Borden Ladner Gervais LLP
Scotia Plaza, 40 King Street West
Toronto, ON M5H 3Y4
Attention: Prema K. R. Thiele
Borden Ladner Gervais LLP
1000 de La Gauchetière Street West, Suite 900, Montreal, Quebec H3B 5H4
Attention: Anick Morin
COST BASIS TAX REPORTING
Section 403 of the Energy Improvement and Extension Act of 2008 amended the Internal Revenue Code to mandate that every broker required to file a return with the IRS reporting gross proceeds from the sale of a covered security additionally report a customer’s adjusted basis in the security and whether any gain or loss on the sale is classified as short-term or long-term.
A security is a “covered security” and therefore subject to the cost basis reporting requirements if it is acquired after its corresponding applicable date. For stock in a corporation, the applicable date is January 1, 2011. Brokers therefore are not required to report basis for any securities acquired before 2011. KCG utilizes the FIFO (First in First Out) methodology for calculating adjusted cost basis. If you wish to elect a different methodology, please contact your sales representative.