3.

Securities Owned and Securities Sold, But Not Yet Purchased

 

The components of securities owned and securities sold, but not yet purchased, at fair value at September 30, 2012 and December 31, 2011 were as follows:

		Securities owned				Securities sold, but not yet purchased
September 30, 2012
Common stock and warrants		$	177			$	87
Restricted common stock and warrants			955				—
Total		$	1,132			$	87
December 31, 2011
Common stock and warrants		$	191			$	78
Restricted common stock and warrants			1,823				—
Total		$	2,014			$	78

 

As of September 30, 2012 and December 31, 2011, approximately $486 and $542 respectively, of securities owned were deposited with the Company’s subsidiaries’ clearing brokers. Under the clearing agreements with these clearing brokers, such clearing brokers may sell or hypothecate such securities.

 

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 September 30, 2012:

 

Securities owned, at fair value		Level 1				Level 2				Level 3				Total
Common stock and warrants		$	177			$	955			$	—			$	1,132
Total		$	177			$	955			$	—			$	1,132

 

Securities sold, but not yet purchased, at fair value		Level 1				Level 2				Level 3				Total
Common stock and warrants		$	76			$	11			$	—			$	87
Total		$	76			$	11			$	—			$	87

 

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

 

Due to their illiquidity, warrants are carried at a discount to fair value as determined by the Black-Scholes option pricing model. 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 September 30, 2012 and December 31, 2011, the fair value of the warrants was $468 and $1,005, respectively, and is included in common stock and warrants (level 2) above.