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Securities Owned and Securities Sold, but not yet Purchased (and Fair Value Measurement)
 12 Months Ended
Dec. 31, 2016
Fair Value Disclosures [Abstract]  
Securities Owned and Securities Sold, but not yet Purchased (and Fair Value Measurement)

4. Securities Owned and Securities Sold, but not yet Purchased (and Fair Value Measurement)

Securities owned and securities sold, but not yet purchased are measured at fair value. The fair value of securities is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., “the exit price”) in an orderly transaction between market participants at the measurement date. ASC 820, Fair Value Measurements, establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs reflect assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is broken down into three levels based on the transparency of inputs as follows:

Level 1 – Quoted prices for identical instruments in active markets.

Level 2 – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

Level 3 – Instruments whose significant drivers are unobservable.

The availability of observable inputs can vary from product to product and is effected by a wide variety of factors, including, for example, the type of product, whether the product is new and not yet established in the marketplace, and other characteristics particular to the transaction. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by management in determining fair value is greatest for instruments categorized in Level 3. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

Fair Valuation Methodology

Cash and Cash Equivalents – These financial assets represent cash in banks or cash invested in highly liquid investments with original maturities less than 90 days. These investments are valued at par, which approximates fair value, and are considered Level 1 (See Note 3).

Securities (Held-to-Maturity) – These securities are Federal agency debt instruments which are instruments that are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 within the fair value hierarchy (See Note 5).

Securities Owned/Sold But Not Yet Purchased – These securities consist of securities classified as trading and AFS, as follows:

 

     December 31,  
     2016      2015  

Securities Owned

      

Trading securities

    $ 1,556      $ —    

Available-for-sale securities

      57,351        —    
  

 

 

     

 

 

  

Total

    $ 58,907      $ —    
  

 

 

     

 

 

  

Securities Sold, but not yet Purchased

      

Trading securities

    $ 1,248      $ —    

Available-for-sale securities

      —          —    
  

 

 

     

 

 

  

Total

    $ 1,248      $ —    
  

 

 

     

 

 

  

Trading securities are investments in exchange traded funds. These instruments are generally traded in active, quoted and highly liquid markets and are therefore classified as Level 1 within the fair value hierarchy. AFS securities are investments in short-term investment grade corporate bonds and are classified as Level 2. Fair value is generally derived from observable bids for these Level 2 financial instruments.

AFS Securities

The following table summarizes unrealized gains, losses and fair value of the AFS securities:

 

     December 31,  
     2016      2015  

Cost

    $ 57,615      $ —    

Gross unrealized gains in other comprehensive income

      —          —    

Gross unrealized losses in other comprehensive income

      (264 )       —    
  

 

 

     

 

 

  

Fair value

    $ 57,351      $ —    
  

 

 

     

 

 

  

All of the Company’s AFS securities are due within one year. The Company assesses the AFS securities for other-than-temporary impairment on a quarterly basis. No AFS securities were determined to be other-than-temporarily impaired for the year ending December 31, 2016.

 

Acquisition Payable (See Note 15) – In April 2014, the Company acquired a 75% majority stake in its European business. Under the terms of the agreement, the remaining 25% was to be acquired on or about March 31, 2018.

As of December 31, 2015, the Company estimated the fair value of the acquisition payable to be $9,900, of which $3,942 was recorded on the Consolidated Balance Sheets. The fair value was categorized as Level 3 and was based on a predefined formula that included the following inputs, many of which were unobservable: the contractual minimum payment obligation, projected European AUM (ranging from $1,000,000 to $6,000,000), the Company’s enterprise value over global AUM, and operating results of the European business. The fair value was determined using a discounted cash flows analysis using a discount rate of 27.5%. Significant increases (decreases) to the projected AUM of the European listed ETPs or operating results of the European business in isolation would have resulted in a higher (lower) fair value measurement. Significant increases (decreases) to the discount rate in isolation would have resulted in a lower (higher) fair value measurement.

In May 2016, the Company accelerated the buyout of the remaining minority interest in its European business. Acquisition payment expense recognized during the year ended December 31, 2016 was $6,738, of which $5,993 was recorded during the three months ended June 30, 2016 in connection with the acceleration of the buyout. The remaining acquisition payable recorded on the Consolidated Balance Sheets was $3,537 at December 31, 2016 (See Note 15).