# TRADESTATION SECURITIES, INC. X-17A-5 (2023-05-30) — Broker-dealer annual report - Company: TRADESTATION SECURITIES, INC. - Form: X-17A-5 - Filed: 2023-05-30 - Period: 2023-03-31 - Accession: 0001002006-23-000002 - CIK: 1002006 - File #: 8-48711 - Type: Broker-dealer - Material weakness: No - Auditor: KPMG LLP - Auditor location: Miami, FL - Contact: James Rojek - Phone: 312-471-4750 - Signed by: James Rojek (CFO and FINOP) Original filing: https://www.sec.gov/Archives/edgar/data/1002006/000100200623000002/TSS_FS_Public_03_31_2023.pdf --- {0}------------------------------------------------ Statement of Financial Condition March 31, 2023 (With Report of Independent Registered Public Accounting Firm Thereon) Filed pursuant to Rule 17a-5(e)(3) Under the Securities Exchange Act of 1934 and CFTC Regulation 1.10(g) As a Public Document {1}------------------------------------------------ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 OMB APPROVAL OMB Number: Expires: Estimated average burden hours per response: SEC FILE NUMBER # ANNUAL REPORTS FORM X-17A-5 PART III | FACING PAGE
Information Required Pursuant to Rules 17a-5, 17a-12, and 18a-7 under the Securities Exchange Act of 1934 | | | | | | | | |--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------|-----------------|--------------------------------------------|--|--|--|--| | | | | | | | | | | | FILING FOR THE PERIOD BEGINNING _____________________ AND ENDING ______________________
MM/DD/YY | | MM/DD/YY | | | | | | A. REGISTRANT IDENTIFICATION | | | | | | | | | NAME OF FIRM: _______________________________________________________________________ | | | | | | | | | TYPE OF REGISTRANT (check all applicable boxes):
Broker-dealer
Security-based swap dealer
Major security-based swap participant
Check here if respondent is also an OTC derivatives dealer | | | | | | | | | ADDRESS OF PRINCIPAL PLACE OF BUSINESS: (Do not use a P.O. box no.) | | | | | | | | | _____________________________________________________________________________________ | | | | | | | | | | (No. and Street) | | | | | | | | _____________________________________________________________________________________ | | | | | | | | | (City) | (State) | | (Zip Code) | | | | | | PERSON TO CONTACT WITH REGARD TO THIS FILING | | | | | | | | | _____________________________________________________________________________________ | | | | | | | | | (Name) | (Area Code – Telephone Number) | (Email Address) | | | | | | | | B. ACCOUNTANT IDENTIFICATION | | | | | | | | INDEPENDENT PUBLIC ACCOUNTANT whose reports are contained in this filing*
_____________________________________________________________________________________ | | | | | | | | | | (Name – if individual, state last, first, and middle name) | | | | | | | | _____________________________________________________________________________________ | | | | | | | | | (Address) | (City) | (State) | (Zip Code) | | | | | | _____________________________________________________________________________________ | | | | | | | | | (Date of Registration with PCAOB)(if applicable) | | | (PCAOB Registration Number, if applicable) | | | | | | | FOR OFFICIAL USE ONLY | | | | | | | \* Claims for exemption from the requirement that the annual reports be covered by the reports of an independent public accountant must be supported by a statement of facts and circumstances relied on as the basis of the exemption. See 17 CFR 240.17a-5(e)(1)(ii), if applicable. Persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. {2}------------------------------------------------ ![](_page_2_Figure_4.jpeg) - - - - - - - - - - - - - - - - - - - - - - - - - - - {3}------------------------------------------------ Statement of Financial Condition March 31, 2023 #### Table of Contents | | Page | |---------------------------------------------------------|------| | Report of Independent Registered Public Accounting Firm | 1 | | Statement of Financial Condition | 2 | | Notes to Statement of Financial Condition | 3 | {4}------------------------------------------------ ![](_page_4_Picture_0.jpeg) KPMG LLP Brickell City Center, Suite 1200 78 SW 7 Street Miami, FL 33130 # **Report of Independent Registered Public Accounting Firm** To the Shareholder and the Board of Directors TradeStation Securities, Inc.: # *Opinion on the Financial Statement* We have audited the accompanying statement of financial condition of TradeStation Securities, Inc. (the Company) as of March 31, 2023, and the related notes (collectively, the financial statement). In our opinion, the financial statement presents fairly, in all material respects, the financial position of the Company as of March 31, 2023, in conformity with U.S. generally accepted accounting principles. ## *Basis for Opinion* This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statement, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statement. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement. We believe that our audit provides a reasonable basis for our opinion. # *Change in Accounting Principle* As discussed in Note 2 to the financial statement, the Company has changed its method of accounting for obligations to safeguard crypto assets as of April 1, 2022 due to the adoption of Securities and Exchange Commission Staff Accounting Bulletin 121. We have served as the Company's auditor since 2011. Miami, Florida May 26, 2023 {5}------------------------------------------------ Statement of Financial Condition March 31, 2023 (In thousands, except share data) #### Assets | Cash and cash equivalents | | 54,830 | |-------------------------------------------------------------------------------------|----|-----------| | Cash and investments segregated in compliance with federal regulations | | 2,696,182 | | Receivables from brokers, dealers, clearing organizations, and clearing agents | | 57,114 | | Receivables from brokerage customers, net (allowance for doubtful accounts of \$95) | | 135,808 | | Securities borrowed | | 531,783 | | Property and equipment, net | | 319 | | Deferred tax asset, net | | 2,228 | | Other assets | | 15,094 | | Due from affiliated companies | | 452 | | Safeguarding assets | | 97,166 | | Total assets | \$ | 3,590,976 | | Liabilities and shareholder's equity | | | | Liabilities: | | | | Payables to brokers, dealers, clearing organizations, and clearing agents | | 5,898 | | Payables to brokerage customers | | 2,716,737 | | Securities loaned | | 540,068 | | Accounts payable and accrued liabilities | | 24,084 | | Due to affiliated companies | | 8,527 | | Safeguarding liabilities | | 97,166 | | Total liabilities | | 3,392,480 | | Shareholder's equity: | | | | Common stock, \$1.00 par value; 1,000 shares authorized; 100 issued and outstanding | | - | | Additional paid-in capital | | 30,334 | | Retained earnings | | 168,162 | | Total shareholder's equity | | 198,496 | | Total liabilities and shareholder's equity | \$ | 3,590,976 | See accompanying notes to statement of financial condition. {6}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 # (1) Description of Business TradeStation Securities, Inc. (the "Company" or "TradeStation Securities") is a wholly owned subsidiary of TradeStation Group, Inc. (the "Parent Company"). The Company is a broker-dealer registered under the Securities Exchange Act of 1934 and is a member of the Financial Industry Regulatory Authority ("FINRA"). The Company is also a member of the National Futures Association ("NFA") and is registered with the Commodity Futures Trading Commission ("CFTC") as a Futures Commission Merchant ("FCM"). The Company executes and clears the vast majority of its customers' securities and commodities transactions. Accordingly, the Company carries accounts for customers and is subject to the requirements of Rule 15c3-3 Customer Protection – Reserves and Custody of Securities of the Securities Exchange Act ("SEA") pertaining to the possession or control of customer-owned assets and reserve requirements. The Company also carries customer commodities accounts and is subject to the requirements of Regulation 1.20 Futures customer funds to be segregated and separately accounted for and Regulation 30.7 Treatment of foreign futures or foreign options secured amount of the Commodity Exchange Act ("CEA"). The Company is also subject to the requirements of Rule 15c3-1 under the Securities Exchange Act ("SEA") and the CFTC's minimum financial requirements (Regulations 1.17 and 5.7). The Parent Company is a wholly owned subsidiary of Monex Group, Inc. (Monex), headquartered in Minato-ku, Tokyo and listed on Section One of the Tokyo Stock Exchange. Monex, principally through its main subsidiary, Monex Inc., provides a variety of financial services to individual investors, including securities brokerage, merger and acquisition advisory, debt and equity underwriting, asset management, investment education, and other investment banking functions. # (2) Summary of Significant Accounting Policies The following is a summary of significant accounting policies adhered to in the preparation of the statement of financial condition: # Use of Estimates The statement of financial condition has been prepared in conformity with generally accepted accounting principles in the United States ("GAAP"), which require management to make certain estimates and assumptions that affect the reported amounts in the accompanying statement of financial condition and the related disclosures. Actual results may differ from those estimates. #### Cash and Cash Equivalents Cash and cash equivalents consist of deposits with banks with an original maturity of three months or less that are not segregated for regulatory purposes. The Company had cash balances in excess of the Federal Deposit Insurance Corporation and the Securities Investor Protection Corporation insurance limits at March 31, 2023. However, the Company places its cash and cash equivalents with high credit quality financial institutions and has not experienced any losses in the cash accounts and does not believe the Company is exposed to any significant credit risk on cash and cash equivalents. {7}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 #### Cash and Investments Segregated in Compliance with Federal Regulations The Company is obligated by rules mandated by two of its primary regulators, the SEC and the CFTC, to set aside cash or qualified securities to satisfy regulations promulgated to protect customer assets. Cash and investments segregated in compliance with federal regulations of \$2.7 billion consists of \$1.96 billion in cash and \$737.5 million in United States Treasury securities (U.S. Treasuries). As of March 31, 2023, amounts segregated in special reserve accounts consist of \$1.35 billion at Sumitomo Mitsui Banking Corporation, \$795.8 million at BMO Harris Bank, \$275.2 million at CME Group and ICE Clear U.S., collectively, \$160 million at JPMorgan Chase, \$101.9 million at Valley National Bank, and \$13 million at Wedbush Securities. Of the total segregated amount of \$2.7 billion, \$1.7 billion is segregated in accordance with Rule 15c3-3 and \$979 million is segregated in accordance with CFTC requirements. On April 3, 2023, cash and investments segregated in compliance with federal regulations decreased by approximately \$30.7 million as a result of a transfer from cash and cash equivalents related to the 15c3-3 calculation as of March 31, 2023. ### Receivables from and Payables to Brokers, Dealers, Clearing Organizations, and Clearing Agents Receivables from brokers, dealers, clearing organizations, and clearing agents consist primarily of deposits with the Company's clearing organizations, accruals related to payments for order flow, securities lending revenues and amounts receivable for securities not delivered by the Company to the purchaser by the settlement date ("fails to deliver"). Payables to brokers, dealers, clearing organizations, and clearing agents include amounts from unsettled trades, including amounts related to futures and options on futures contracts executed on behalf of customers, clearing and exchange fees, and amounts payable for securities not received by the Company from a seller by the settlement date ("fails to receive"). Securities owned by equities and futures customers, including those that collateralize margin loans or similar transactions, are not included in the Company's statement of financial condition. #### Securities Borrowed and Loaned Included in securities borrowed are securities borrowed from broker-dealers and securities borrowed in connection to the fully paid lending program ("FPL"), which allows customers to earn income on certain securities when they permit the Company to lend these securities. Securities borrowed from broker-dealers require the Company to deliver cash to the lender in exchange for securities, and the Company receives cash as collateral for securities loaned transactions. Securities borrowed from broker-dealers and securities loaned transactions are recorded at the amount of cash collateral advanced or received, respectively. Securities borrowed in connection with the FPL program are recorded at the amount of cash collateral on deposit as of March 31, 2023. {8}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 #### Receivables from Brokerage Customers, net and Payables to Brokerage Customers The Company's receivables from brokerage customers, net consist primarily of margin loans to securities brokerage customers. The Company enters into margin lending arrangements which allow customers to borrow against the value of their qualifying securities. Margin loans are collateralized by securities and cash in the customer's account and collateral is required to be maintained at specified minimum levels at all times. The Company monitors margin levels and requires clients to provide additional collateral, or reduce margin positions, to meet the minimum collateral requirements, if the fair value of the collateral changes. Customer securities collateralizing margin loans are not reflected in the Company's statement of financial condition. The Company applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for margin loans. An allowance for credit losses on unsecured or partially secured receivables from brokerage clients is estimated based on the aging of those receivables. Unsecured balances due to confirmed fraud are reserved immediately. The allowance for credit losses for receivables from brokerage customers was immaterial for the period presented. Payables to brokerage customers primarily consist of client cash held in brokerage accounts and is carried at the amount of client cash on deposit. Payables to brokerage customers also include futures customers' equity on open trades. During the year ended March 31, 2023, neither the Company nor its commodities customers engaged in cleared swaps transactions under section 4d(f) of the Commodity Exchange Act. #### Current Expected Credit Losses The Company follows Accounting Standards Codification ("ASC") 326 – Financial Instruments – Credit Losses. For on-balance sheet assets in scope, an allowance must be recognized at the origination or purchase of the assets and represents the expected credit losses over the contractual life of those assets. Expected credit losses on offbalance sheet credit exposures must be estimated over the contractual period the Company is exposed to credit risk as a result of a present obligation to extend credit. We have assessed the impact and deemed that no additional allowance, other than the allowance for credit losses for receivables from brokerage customers, is necessary. #### Property and Equipment, net Property and equipment are stated at cost, less accumulated depreciation. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets, which are as follows: | Computers and software | 3 – 5 | |-------------------------|-------------------------------------| | Furniture and equipment | 3 – 7 | | Leasehold improvements | Lesser of useful life or lease term | Expenditures related to repairs and maintenance are expensed as incurred. Upon the sale or retirement of property and equipment, the cost and related accumulated depreciation are removed from the statement of financial condition and any resulting gain or loss is recognized. {9}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 #### Exchange Memberships Exchange memberships are recorded at cost and are evaluated for impairment as circumstances may warrant (see Impairment of Long-Lived Assets). The Company's shares of ICE common stock are carried at fair value based on the closing stock price of ICE. As of March 31, 2023 the shares were valued at \$1.6 million. The Company's exchange memberships and ICE shares are included within other assets in the accompanying statement of financial condition. #### Impairment of Long-Lived Assets The Company evaluates long-lived assets, including property and equipment, net and exchange memberships recorded at cost, for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses are recognized if the carrying amount exceeds the sum of the undiscounted cash flows estimated to be generated by those assets. The amount of impairment loss is calculated as the amount by which the carrying value exceeds fair value. No impairment occurred during the year ended March 31, 2023. #### Fair Value of Financial Instruments Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurement accounting guidance describes the fair value hierarchy for disclosing assets and liabilities measured at fair value based on the inputs used to value them. The fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. In accordance with the fair value hierarchy, three levels of inputs may be used to measure fair value: - Level 1 inputs are unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. - Level 2 inputs are quoted prices for similar assets in an active market, quoted prices in markets that are not considered active or financial instruments for which inputs are observable, either directly or indirectly. - Level 3 inputs are prices or valuations that are significant to the fair value measurement and are unobservable. The Company applies valuation techniques consistent with the market approach for assets measured at fair value on a recurring basis. A quoted price in an active market provides the most reliable evidence of fair value and is generally used by the Company to measure fair value whenever available. #### Leases The Company records leases in accordance with Accounting Standards Codification Topic 842 – Leases, requiring the recognition of right-of-use ("ROU") assets and lease liabilities on the balance sheet. ROU assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. {10}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 The Company has lease agreements with lease and non-lease components. The Company has elected the practical expedient to account for the lease and non-lease components as a single lease component. As the rates implicit in the leases are not readily determinable, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. Lease terms may include periods covered by options to extend when it is reasonably certain that the Company will exercise those options. The Company's lease agreements do not contain any residual value guarantees or restrictive covenants. #### Income Taxes The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for periods in which the differences are expected to reverse. The effect of changes in tax rates on deferred tax assets and liabilities are recognized in income in the period that includes the enactment date. A valuation allowance is established for deferred tax assets when management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company's results are included in the consolidated federal and state income tax returns of the Parent Company. As required, the Company records any income tax expense and liability based upon its operations on a stand-alone basis, even though the Company is part of the consolidated income tax returns. Federal and state income taxes are computed, under a tax sharing agreement with the Parent Company, based on the separate return method. As a result of the inclusion in consolidated filings, the income taxes payable are reported in accounts payable and accrued liabilities on the statement of financial condition and are periodically settled through cash transfers to the Parent Company. #### Staff Accounting Bulletin No. 121 Staff Accounting Bulletin No. 121 ("SAB 121"), effective April 11, 2022, provides interpretive accounting and disclosure guidance to entities that have obligations to safeguard crypto-assets held for their platform users, whether directly or through an agent or another third party that is involved in the safekeeping. The guidance is to be applied no later than for the first reporting period ending after June 15, 2022. The Company, as an SEC-licensed broker-dealer with an affiliate that conducts crypto-assets brokerage business (the "Crypto-Assets Broker"), which are both 100% wholly owned subsidiaries of the Parent Company, has determined it will apply the accounting guidance of SAB No. 121. The Company: (a) does not safeguard, provide any service to safeguard, or have legal or regulatory obligations to safeguard, crypto-assets held for its platform users, or any other entity's platform users, or have any other involvement with safeguarded crypto assets, including any control of the flow of transactions for the safeguarding of crypto-assets, and has not engaged, or been engaged by, any third party to do any of the foregoing; (b) does not offer or provide any platform to users which allows inputs for orders to buy or sell, or to deposit or withdraw, or to custody, crypto-assets; (c) does not maintain or have access to any cryptographic key information or wallets necessary to access crypto-assets; (d) does not have any legal title or claim to crypto-assets; and (e) is not a party to any agreement that offers users the ability to make inputs for orders to buy or sell, or to deposit or withdraw, or {11}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 to custody, crypto-assets using a Company platform. In fact, the Company's customer agreement prominently states to the user that: "You understand and agree that in no manner is or will [the Company] be part of, in the business of, or otherwise involved in, the processing of Digital Asset transactions (as a principal, agent, intermediary, or otherwise), including but not limited to the purchase, sale, deposit, withdrawal, transfer or custody of Digital Assets…" The Crypto-Assets Broker's customer agreement prominently makes the same statement regarding the Company. Further, both the Company's and the Crypto-Assets Broker's customer agreements prominently state that the Company's customer agreement is separate from, and independent of, the Crypto-Assets Broker's customer agreement, that the types of accounts covered by each agreement are likewise separate and independent in all respects, and that each account is with a separate and distinct entity. Crypto-Assets Broker's customers that need to transfer fiat funds for crypto transactions process those transfers through a separate account that they hold with the Company. The Company's customers and the Crypto-Assets Broker's customers can access their confirmations, statements and tax documents from the TradeStation Client Center which is an affiliated technology company's portal for customers to access their documents and account updates. There is also a prominent disclosure to users and the public about "safeguarding your crypto assets," which states that the Crypto-Assets Broker uses BitGo custodial services and applications (BitGo is an independent, industryleading wallet-management services and trust company), and neither the Company nor the Crypto-Assets Broker suggests to users or the public that the Company is involved in safeguarding crypto-assets (the disclosures made to customers in fact expressly state the opposite). Further, the Company does not describe its business model as one of safeguarding customers' crypto-assets, or have an express or implied obligation to safeguard any thirdparty's crypto-assets under any customary business practices or published policies, and has not implemented any processes to safeguard crypto-assets. All inputs for orders to buy or sell, or to deposit or withdraw, or to custody, crypto-assets may be made only through the crypto-asset user platform provided by the Crypto-Assets Broker (a trading platform licensed to it from an independent development firm, which is separate and distinct from the Company's trading platforms), and all deposits of crypto-assets by the customer are made directly with, and withdrawals of crypto-assets directly from, the Crypto-Assets Broker through the BitGo wallets held in the Crypto-Assets Broker's name. The Company is not involved with record-keeping of crypto-assets safeguarded for third parties; such recordkeeping is performed by the Crypto-Assets Broker using applications provided to it under its contracts with BitGo and the independent platform service provider. If the Crypto-Assets Broker were to cease operations, the user would have no recourse to the Company or its platforms to access or withdraw the user's crypto-assets, but rather would need to access the Crypto-Assets Broker's platform (through that platform's connection to BitGo wallets) to do so. Because the Company has no obligation to safeguard any crypto-assets, and makes clear to the user it has no such obligation, the Company believes there is no significant risks for failing to do so, including risk of financial loss. As a result of the adoption of SAB 121, the Company recognized in the statement of financial condition a safeguarding liability and corresponding assets each in the amount of \$97.2 million as of March 31, 2023. The statement of financial condition as of March 31, 2023 of the Crypto-Assets Broker (the entity with safeguarding obligations relating to the crypto-assets) likewise discloses an amount of liability and corresponding assets for safeguarding customer crypto-assets in the amount of \$97.2 million. The Company believes the adoption of SAB No. 121 has no impact on compliance with SEA Rule 15c3-1 and SEA Rule 15c3-3. {12}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 The below table summarizes the fair value, in USD, of the crypto-assets at March 31, 2023: | Bitcoin (BTC): | \$50.4 million | |--------------------------|----------------| | Ethereum (ETH): | \$34.5 million | | All other crypto-assets: | \$12.3 million | The Company is not aware of any loss events regarding these crypto-assets, such as theft, loss or destruction of the cryptographic keys, borne by the Crypto-Assets Broker or BitGo, and as of March 31, 2023 no loss events have been identified by the Company. # (3) Receivables from and Payables to Brokers, Dealers, Clearing Organizations and Clearing Agents Receivables from brokers, dealers and clearing organizations consist of the following as of March 31, 2023 (in thousands): | Deposits with clearing organizations | | \$ 50,995 | |-------------------------------------------------------------------------------------|--|-----------| | Receivables from order flow | | 4,409 | | Receivables from clearing organizations | | 548 | | Fails to deliver to broker-dealers | | 13 | | Other | | 1,149 | | Total receivables from brokers, dealers, clearing organizations and clearing agents | | \$ 57,114 | As a self-clearing broker-dealer and FCM, the Company is subject to clearing organization and other cash deposit requirements which are, and may continue to be, large in relation to the Company's total liquid assets. The balances may fluctuate significantly from time to time based upon the nature and size of the Company's customers' trading activity. As of March 31, 2023, the Company had cash deposits and U.S. Treasuries with clearing organizations totaling \$27.2 million and \$23.8 million, respectively, for the clearing of stock trades, standardized equity option trades and futures trades. Payables to brokers, dealers, and clearing organizations consist of the following as of March 31, 2023 (in thousands): | Payables to clearing organizations | \$
5,876 | |----------------------------------------------------------------|-------------| | Fail to receive from broker-dealers | 22 | | Total payables to brokers, dealers, and clearing organizations | \$
5,898 | # (4) Receivables from Brokerage Customers, net As of March 31, 2023, the Company had receivables from brokerage customers, net of \$135.8 million. Customers with margin loans have agreed to allow the Company to repledge or sell collateralized securities in accordance with federal regulations. As of March 31, 2023, the fair value of the collateral that the Company was permitted to repledge was \$187.2 million, of which \$35.6 million has been repledged to other broker-dealers in connection with securities lending agreements and to effectuate customer short sales. {13}------------------------------------------------ #### Notes to Statement of Financial Condition March 31, 2023 # (5) Property and Equipment, Net Property and equipment, net, consist of the following as of March 31, 2023 (in thousands): | Computers and software | \$
4,479 | |-----------------------------------|-------------| | Furniture and equipment | 248 | | Leasehold improvements | 70 | | Construction-in-progress | 68 | | Total property and equipment | 4,865 | | Accumulated depreciation | (4,546) | | Total property and equipment, net | \$
319 | #### (6) Related Party Transactions The Company has a License and Support Agreement (the Agreement) with TradeStation Technologies, Inc. (TTI), a wholly owned subsidiary of the Parent Company. The terms of the Agreement require the Company to pay for the licensing of TradeStation plus support and other services. TradeStation is an electronic trading platform that enables customers to design, test and monitor their own custom trading strategies and then automate them with electronic order placement. The Company is charged a monthly licensing fee for each customer using TradeStation. The Agreement also requires the Company to pay for certain communication costs. The Company has an expense-sharing agreement with the Parent Company, TTI, TradeStation Crypto Inc. (TCI) and TradeStation International Limited (TSIL). TCI and TSIL are wholly owned subsidiaries of the Parent Company. The expense-sharing agreement requires the allocation among the parties of all costs and expenses paid by any member of the group from which other parties benefit. Based on the expense-sharing agreement, the Company is required to pay monthly fees for administrative services. In relation to the expense-sharing agreement, the Company was allocated marketing costs paid for by TTI and the Company allocated brand-level and shared marketing expenses to TCI. The Company has agreements with Monex, Inc. and Boom Securities Limited, two wholly owned subsidiaries of Monex, whereas the affiliates have omnibus accounts with the Company for the purpose of providing their customers' access to the U.S. equities market. The Company provides clearing and settlement services and charges commissions. Included in payables to brokerage customers, as reported in the statement of financial condition, is \$97.4M and \$1M for Monex, Inc. and Boom Securities Limited, respectively. The Company also has a third-party introduction agreement with TSIL, which is authorized by the United Kingdom Financial Conduct Authority (FCA) to introduce certain international brokerage customers to the Company. The Parent Company has an operating lease agreement, expiring in May 2032, for its corporate headquarters in Plantation, Florida. The Company is allocated a portion of the cost of this lease, based on headcount and dedicated time. {14}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 On January 25, 2017, the Company and its Parent Company entered into a revolving credit facility agreement. Under the credit facility, the Company can borrow up to \$80 million for liquidity or working capital needs. During the year ended March 31, 2023, the Company did not utilize the credit facility. This revolving credit facility is supported by revolving credit facilities the Parent Company maintains with unaffiliated banks and Monex Finance Corporation, an affiliate. The amount due to affiliated companies represents the net amounts payable to certain affiliates as the result of various transactions, including amounts payable under the Agreement and the expense-sharing agreement. These amounts are noninterest bearing, have no defined repayment terms, and are expected to be repaid periodically using current available cash balances or through future profits earned by the Company. The amount due from affiliated companies represents the net amounts receivable from certain affiliates as a result of various transactions, including amounts receivable under the expense-sharing agreement. These amounts are noninterest bearing, have no defined repayment terms, and are expected to be repaid periodically to the Company by its affiliates primarily using their available cash balances. # **(7) Employee Benefit Plans** The Company participates in the Parent Company's defined contribution 401(k) plan (the 401(k) Plan). All employees with at least three months of continuous service are eligible to participate and may contribute up to 60% of their compensation up to the annual limit set by the Internal Revenue Service. Employer matching contributions are discretionary, as defined in the 401(k) Plan, and are vested 20% for each year of service. # **(8) Income Taxes** As of March 31, 2023, the Company had income tax payable of \$10.4 million included in accounts payable and accrued liabilities, pertaining to federal and certain state jurisdictions. Tax payable balances are settled periodically through cash transfers to the Parent Company. The Company is no longer subject to United States federal tax examinations for tax returns prior to 2020 or state and local tax examinations prior to 2019. Deferred income tax assets and liabilities are recorded when revenues and expenses are recognized in different periods for financial and income tax reporting purposes. The temporary differences that created deferred income tax assets and liabilities are as follows as of March 31, 2023 (in thousands): {15}------------------------------------------------ #### Notes to Statement of Financial Condition #### March 31, 2023 | Deferred tax assets: | | |---------------------------------------|-------------| | Accrued expenses and other | \$
522 | | Lease liability | 714 | | Unrealized gain/(loss) | 2,590 | | Federal benefit of state income taxes | 207 | | Hurricane credit | 55 | | Safeguarding liabilities | 23,734 | | Total deferred tax assets | 27,822 | | Deferred tax liabilities: | | | Right-of-use asset | (640) | | Prepaids | (1,165) | | Property and equipment, net | (55) | | Safeguarding assets | (23,734) | | Total deferred tax liabilities | (25,594) | | Deferred tax asset/(liability), net | \$
2,228 | No valuation allowance was recorded for deferred tax assets as of March 31, 2023. Management believes that all deferred tax assets are more likely than not of being realized. The future benefit of deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible. Management considers the projected future taxable income, the scheduled reversal of deferred tax liabilities and tax planning strategies in making this assessment. The following table summarizes the activity related to the Company's unrecognized tax benefits (in thousands): | Beginning balance | \$ 1,457 | |----------------------------------------------------------------|----------| | Increases related to positions taken during a prior period | 792 | | Decreases related to tax positions taken during a prior period | (690) | | Ending balance | \$ 1,559 | The gross amount of the unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate was \$1.6 million as of March 31, 2023, and are reported as a component of accounts payable and accrued liabilities on the statement of financial condition. # (9) Net Capital Requirements The Company is subject to the net capital requirements of the SEC's Uniform Net Capital Rule (SEA Rule 15c3- 1) and the CFTC Minimum financial requirements for futures commissions merchants (CEA Regulation 1.17). Under these rules, the Company calculates its net capital requirements using the "alternative method," which requires the maintenance of minimum net capital, as defined by the rules, equal to the highest of: (i) \$1,500,000; (ii) 8.0% of the total commodities risk margin requirement for all positions carried in customer and non-customer accounts; or (iii) 2.0% of aggregate customer debit items. At March 31, 2023, the Company had net capital of \$166.2 million (96.71% of aggregate debit items), which was \$157 million in excess of its required net capital of \$9.2 million. {16}------------------------------------------------ #### Notes to Statement of Financial Condition March 31, 2023 # (10) Fair Value # Assets and Liabilities Measured at Fair Value on a Recurring Basis The Company uses quoted prices in active markets to measure the fair value of assets. The following table summarizes the assets measured at fair value on a recurring basis in the Company's statement of financial condition as of March 31, 2023 (in thousands): | | | | | Total Fair | |------------------------------------------------------------------------------------|------------|---------|---------|------------| | | Level 1 | Level 2 | Level 3 | Value | | Investments segregated in compliance with federal regulations | \$ 737,499 | \$
— | \$
— | \$ 737,499 | | Receivables from brokers, dealers, clearing organizations, and clearing agents (1) | 23,836 | — | — | 23,836 | | Other assets (2) | 1,649 | — | — | 1,649 | | Safeguarding assets | 97,166 | — | — | 97,166 | | Total assets measured at fair value | \$ 860,150 | \$
— | \$
— | \$ 860,150 | (1) Receivables from brokers, dealers, clearing organizations and clearing agents include U.S. Treasuries pledged as margin collateral with the clearing organizations. (2) Other assets primarily include shares of ICE common stock (NYSE-listed equity security). As of March 31, 2023, the Company also reported a Level 1 safeguarding liabilities balance of \$97.2M, which is directly related to the safeguarding assets balance presented in the table above. # Assets and Liabilities Not Measured at Fair Value on a Recurring Basis Cash and cash equivalents, cash segregated in compliance with federal regulations, securities borrowed and securities loaned: The carrying value of these short-term financial instruments are recorded at amounts that approximate the fair value of these instruments. These financial instruments generally expose the Company to limited credit risk, have open/continuous or short-term maturities, and carry interest rates that approximate market rates. Under the fair value hierarchy, cash and cash equivalents and cash segregated in compliance with federal regulations are classified as Level 1 and securities borrowed and securities loaned are classified as Level 2. Receivables from/payables to brokers, dealers, clearing organizations and clearing agents, receivables from/ payables to brokerage customers, accounts payable and accrued liabilities, and due to/due from affiliated companies: These financial instruments include cash deposited with clearing organizations and agents, margin loans to customers and customer cash deposits, and various other receivables/payables of a similar nature. These financial instruments are recorded at amounts that approximate fair value and are classified as Level 2 under the fair value hierarchy. # (11) Leases The Company records ROU assets, net in other assets, and lease liabilities are recorded in accounts payables and accrued liabilities in the accompanying statement of financial condition. The following table details the amounts reported in the statement of financial condition as of March 31, 2023 (in thousands): | ROU assets, net | \$
1,550 | |-------------------|-------------| | Lease liabilities | \$
1,852 | {17}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 The Company is obligated under non-cancelable operating leases for its Chicago office expiring in February 2027 and its New York office expiring in September 2023. The following table presents supplemental lease information as of March 31, 2023: | Weighted average of remaining lease term (years) | 3.74 | |--------------------------------------------------|-------| | Weighted average discount rate | 3.32% | Future minimum lease payments as of March 31, 2023, under all operating leases, are as follows (in thousands): | Year ended March 31, | | |------------------------------------|----------| | 2024 | 535 | | 2025 | 474 | | 2026 | 489 | | 2027 | 471 | | Thereafter | — | | Total lease payments | 1,969 | | Less: imputed interest | (117) | | Present value of lease liabilities | \$ 1,852 | #### (12) Securities Borrowed and Loaned With respect to securities borrowed transactions, decreases in securities prices may cause the market value of the securities borrowed to fall below the amount of cash deposited as collateral. In the event the counterparty to these transactions does not return the cash deposited, the Company may be exposed to the risk of selling the securities at prevailing market prices. The Company has established policies and procedures for mitigating credit risk on securities borrowed transactions, including requiring credit approvals, establishing limits and thresholds for credit exposure, and continually assessing the creditworthiness of the counterparties. The Company minimizes the credit risk associated with these activities by monitoring the collateral values daily and requiring cash to be returned as needed to ensure full collateralization. The Company applies the practical expedient based on collateral maintenance provisions in estimating an allowance for credit losses for securities borrowed receivables. The Company loans securities temporarily to other broker-dealers in connection with its broker-dealer business. Increases in securities prices may cause the market value of the securities loaned to exceed the amount of cash received as collateral. In the event the counterparty to these transactions does not return the loaned securities, the Company may be exposed to the risk of acquiring the securities at prevailing market prices to satisfy its client obligations. The Company seeks to mitigate this risk by requiring credit approvals, establishing limits and thresholds for credit exposure, and continually assessing the creditworthiness of the counterparties. Additionally, the Company monitors the value of securities loaned daily and requires additional cash collateral as needed to ensure full collateralization. {18}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 The Company's securities borrowing, and securities lending transactions are transacted under master agreements that are widely used by counterparties and that may allow for net settlements of payments in the normal course, as well as offsetting of all contracts with a given counterparty in the event of a bankruptcy or default of one of the two parties to the transaction. The Company seeks to minimize this risk by continually reviewing the credit quality of its counterparties. The Company does not offset securities borrowing and securities lending transactions within the statement of financial condition. The following table presents information about these transactions to evaluate the potential effects of rights of offset between these recognized assets and liabilities as of March 31, 2023 (in thousands). | | Gross amounts
of assets
and liabilities | Gross amounts
ofsset in the
statement of | Net amounts
presented in the
statement of | Amounts not offset
in the statement of
financial condition
Collateral received
or pledged | | |----------------------------|-----------------------------------------------|------------------------------------------------|-------------------------------------------------|-------------------------------------------------------------------------------------------------------|------------| | | recognized | | financial condition financial condition | (including cash) | Net amount | | Assets: | | | | | | | Securities borrowed (1) \$ | 531,783 \$ | — | \$
531,783 \$ | (498,543)
\$ | 33,240 | | Liabilities: | | | | | | | Securities loaned | \$
540,068 \$ | — | \$
540,068 | \$
(502,930)
\$ | 37,138 | (1) Securities borrowed includes approximately \$161 million in relation to the Company's FPL program. Included in securities borrowed is \$24.1 million and included in securities loaned is \$77.8 million transacted through a program with a clearing organization, which guarantees the return of cash to the Company. # (13) Commitments and Contingencies #### Litigation and Claims The Company accrues a liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In many lawsuits and regulatory proceedings, it is not possible to determine whether a liability has been incurred or to estimate the ultimate or minimum amount of that liability until the matter is close to resolution. In view of the inherent difficulty of predicting the outcome of such matters, the Company cannot determine the probability or estimate what the eventual loss or range of loss related to such matters will be. Subject to the foregoing, the Company continues to assess these matters and believes, in conjunction with consultation with outside counsel that based on information available to it, that the resolution of these matters will not have a material adverse effect on its statements of operations and financial condition. {19}------------------------------------------------ Notes to Statement of Financial Condition March 31, 2023 The Company is engaged in regulatory matters, including investigations and enforcement, as well as regulatory exams that could result in investigations and enforcement, and routine civil litigation, such as customer arbitrations and reparation proceedings and, from time to time, actions brought by former employees relating to termination of employment. Pending regulatory investigations and enforcement actions could ultimately result in a censure and/or fine, and such other civil litigation could result in judgments or settlements for damages and other relief. While no assurances can be given, the Company does not believe that the ultimate outcome of any such pending regulatory or civil matters will result in a material, adverse effect on the Company's business or financial condition. #### General Contingencies and Guarantees In the ordinary course of business, there are various contingencies that are not reflected in the statement of financial condition. These include customer activities involving the execution, settlement and financing of various customer securities and futures transactions. These activities may expose the Company to off-balance sheet credit risk in the event the customers are unable to fulfill their contractual obligations. In margin transactions, the Company may be obligated for credit extended to its customers by the Company or its clearing agents. In connection with securities activities, the Company also executes customer transactions involving the sale of securities not yet purchased (short sales), all of which are transacted on a margin basis subject to federal, self-regulatory organization and individual exchange regulations and the Company's internal policies. The customers' financing and securities settlement activities may require the Company and its clearing agents to pledge customer securities as collateral in support of various secured financing sources, which may include bank loans. In the event the counterparty is unable to meet its contractual obligation to return customer securities pledged as collateral, the Company may be exposed to the risk of needing to acquire the securities at prevailing market prices in order to satisfy its obligations. The Company seeks to manage this risk by monitoring the market value of securities pledged on a daily basis. The Company provides guarantees to its clearing organization and exchanges under their standard membership agreements, which require members to guarantee the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to a clearing organization or exchange, other members would be required to meet the shortfalls. The Company's liability under these arrangements is not quantifiable and may exceed the cash and securities it has posted as collateral. However, management believes that the possibility of the Company being required to make payments under these arrangements is remote. Accordingly, no liability has been recorded for these potential events. # (14) Subsequent Events The Company has evaluated events and transactions occurring subsequent to March 31, 2023 as of May 26, 2023. Management believes that no material events have occurred since March 31, 2023 that require recognition or disclosure in the statement of financial condition. Source: SEC EDGAR via Adviser Search (https://search.stillhousedata.com). Agents: see https://search.stillhousedata.com/llms.txt.