3.

Securities Owned and Securities Sold, But Not Yet Purchased

 

The components of marketable securities owned and securities sold, but not yet purchased, at fair value at March 31, 2012 and December 31, 2011 were as follows:

 

		Securities owned				Securities sold, but not yet purchased
March 31, 2012
Common stock and warrants		$	3,815			$	(33	)
Restricted common stock and warrants			1,314				—
Total		$	5,129			$	(33	)
December 31, 2011
Common stock and warrants		$	191			$	(78	)
Restricted common stock and warrants			1,823				—
Total		$	2,014			$	(78	)

 

As of March 31, 2012 and December 31, 2011, approximately $3,954 and $542, respectively, of securities owned were deposited with the Company’s subsidiaries’ clearing broker. Under the clearing agreements with such clearing broker, the securities may be sold or hypothecated by such clearing broker.

 

Securities sold, but not yet purchased, at fair value represent obligations of the Company’s subsidiaries to purchase the specified financial instrument at the then current market price. Accordingly, these transactions result in off-balance-sheet risk as the Company’s subsidiaries’ ultimate obligation to repurchase such securities may exceed the amount recognized in the condensed consolidated statements of financial condition.

 

The fair value hierarchy, established under authoritative accounting guidance, ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

 

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Level 1 — Quoted prices in active markets for identical assets or liabilities.

  

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Level 2 — Inputs other than quoted prices in active markets, which are directly or indirectly observable for the asset or liability.

 

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Level 3 — Unobservable inputs for the asset or liability where there is little or no market data, which requires the reporting entity to develop its own assumptions.

 

Securities are carried at fair value and classified as follows:

 

As of March 31, 2012:

 

Securities owned, at fair value		Level 1				Level 2				Level 3				Total
Common stock and warrants		$	3,815			$	1,314			$	—			$	5,129
Total		$	3,815			$	1,314			$	—			$	5,129

 

Securities sold, but not yet purchased, at fair value		Level 1				Level 2				Level 3				Total
Common stock and warrants		$	23			$	10			$	—			$	33
Total		$	23			$	10			$	—			$	33

 

As of December 31, 2011:

 

Securities owned, at fair value		Level 1				Level 2				Level 3				Total
Common stock and warrants		$	191			$	1,823			$	—			$	2,014
Total		$	191			$	1,823			$	—			$	2,014

 

Securities sold, but not yet purchased, at fair value		Level 1				Level 2				Level 3				Total
Common stock and warrants		$	68			$	10			$	—			$	78
Total		$	68			$	10			$	—			$	78

 

Warrants are carried at a discount to fair value as determined by using the Black-Scholes option pricing model due to illiquidity. This model takes into account the underlying securities' current market value, the market volatility of the underlying securities, the term of the warrants, exercise price, and risk-free rate of return. As of March 31, 2012 and December 31, 2011, the fair value of the warrants was $697 and $1,005, respectively, and is included in common stock and warrants (level 2) above.