The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements, including the notes thereto.

Overview

Investment Technology Group, Inc. is a specialized agency brokerage and financial technology firm that partners with asset managers globally to provide innovative solutions spanning the investment continuum. The Company has four reportable operating segments: U.S. Operations, Canadian Operations, European Operations and Asia Pacific Operations, following the realignment of its organizational structure in the second quarter of 2009 (see Note 15 to the Condensed Consolidated Financial Statements, Segment Reporting). The U.S. Operations segment provides trading, trade order management, network connectivity and research services to institutional investors, plan sponsors, brokers, alternative investment funds and money managers. The Canadian Operations segment provides trading, network connectivity and research services. The European Operations segment includes our trading, trade order management, network connectivity and research service businesses in Europe, as well as a technology research and development facility in Israel. The Asia Pacific

Operations segment includes our trading, trade order management, network connectivity and research service businesses in Australia, Hong Kong, Japan and Singapore.

Our revenues principally consist of commissions and fees from customers' use of our trade execution services. Because commissions are earned on a per-transaction basis, such revenues fluctuate from period to period depending on (i) the volume of securities traded through our services in the U.S. and Canada, (ii) the contract value of securities traded in Europe and Asia Pacific, and (iii) our commission rates. Commission revenues are generated by orders delivered to us from our order and execution management products and other vendors' products, direct computer-to-computer links to customers through ITG Net (our financial communications network) and third party networks and phone orders from our customers. Fee revenues are generated on transactions from our spread trading business, whereby orders are filled within the National Best Bid and Offer ("NBBO") and we earn a fee from a portion of the spread between the execution price and the prevailing NBBO for the relevant security. We also operate a matched book stock borrow/stock loan business where we act as an intermediary in the borrowing and lending of securities from and to other broker-dealers and financial institutions. Our profit is earned on the interest spreads generated from the borrowing and lending activities. In Canada, we also generate revenue from interlisted arbitrage trading, where we profit from small price differences by simultaneously purchasing and selling the same equity security in the Canadian and U.S. markets. We also generate recurring revenues, which are largely fee or subscription-based rather than transaction-based, and are therefore significantly less variable. Our subscription-based revenues principally consist of revenues from sales of analytical products, network connectivity and order management system services.

Executive Summary

In the third quarter of 2009, our consolidated revenues decreased 16% to $158.4 million relative to the third quarter of 2008 while our operating expenses decreased 9% to $130.4 million. Net income for the third quarter of 2009 was $17.5 million, or $0.40 per diluted share, as compared to $27.2 million, or $0.62 per diluted share in the third quarter of 2008. Our U.S. revenue was $114.6 million in the third quarter of 2009, declining $26.5 million or 19% compared to the third quarter of 2008.

Global financial markets rebounded in the third quarter of 2009 compared to the third quarter of 2008. While the market volatility and equity risk aversion that characterized late 2008 and early 2009 have subsided, equity market values remain largely below third quarter 2008 levels. The CBOE Volatility Index ("VIX") averaged 25.5 in the third quarter of 2009, virtually unchanged from 25.1 in the third quarter of 2008, and down from an average of 33.0 in the second quarter of 2009. Historically, the VIX reached a peak of 89.5 on October 24, 2008, its highest level since the index was first published in 1990 and has since trended downward, with some occasional spikes, toward a more normalized level.

The S&P 500 and NASDAQ Composite indices increased 15% and 16%, respectively, during the third quarter of 2009. The S&P 500 was still 9% below its September 30, 2008 level, but the NASDAQ Composite was actually 1% higher than the year-ago period. New flows into U.S.-based equity mutual funds were $2.7 billion in the third quarter of 2009 compared with net outflows of $52 billion in the third quarter of 2008, according to the Investment Company Institute. While the overall macroeconomic and business environment has stabilized, it continues to present a set of challenges to us both domestically and internationally.

Overall U.S. equity trading volume, measured by share volume in NYSE and NASDAQ-listed securities, was slightly lower in the third quarter of 2009 relative to the comparable 2008 quarter. Average daily volume in NYSE-listed and NASDAQ-listed securities was 5.5 billion shares and 2.3 billion shares, respectively.

Our U.S. equity volumes fell from 217.6 million average daily shares executed in the third quarter of 2008 to 180.0 million average daily shares executed in the third quarter of 2009, representing a decrease of 17%. Revenue per share fell 3% from the second quarter of 2009 and was14% lower than the prior year quarter. Flows into U.S.-based equity mutual funds have been skewed towards index fund managers and international equity funds, while funds investing in domestic equities (which comprise the core of our U.S. customer base) had $10.9 billion in net outflows in the third quarter of 2009. Accordingly, we did not see a resurgence in activity with our sizable base of large, active money managers who use our products across the trading continuum and therefore, customer mix continued to pressure revenue per share in the third quarter of 2009.

In Canada, our revenues for the third quarter of 2009 were $15.7 million, decreasing $5.4 million or 26% from the comparable 2008 quarter. The revenue decline included the impact of the strengthening U.S. Dollar, which reduced revenues and pre-tax income by approximately $0.8 million and $0.2 million, respectively. Equity trading volume on the Toronto Stock Exchange ("TSX") increased 10% in the third quarter of 2009 to 28.3 billion shares from 25.7 billion shares in the

third quarter of 2008. A significant factor for the increased 2009 volume was the TSX's introduction (in the fourth quarter of 2008) of an incentive program for electronic liquidity providers that trade on a proprietary basis (such as electronic market makers). These electronic liquidity providers are generally not a component of our core client base. The program gained rapid acceptance and is estimated to be responsible for as much as 25% of all TSX volume. Excluding the estimated volume attributable to the TSX's incentive program for these electronic liquidity providers, TSX volume in the third quarter declined approximately 18%, which is consistent with the decline in ITG commission revenues.

Although European markets rallied during the third quarter of 2009, equity market values still remained below the comparable prior year levels. While the decline in market values did contribute to our commission revenue decrease (as trading commissions are generally based on the value of a customer trade, or ad valorem, within our European operation), commission revenues were most affected by the strengthening of the U.S. Dollar relative to the Pound Sterling, which reduced our commission revenues by $2.3 million while favorably affecting pre-tax income by $0.2 million during the third quarter compared to the prior year quarter.

Our Asia Pacific revenues increased 18% in the third quarter of 2009 relative to the comparable 2008 quarter. The regional stock markets were mixed on a year-over-year basis, with the Nikkei 225 ending the third quarter 10% below its September 30, 2008 level, while the Hang Seng and ASX 200 indices were up 16% and 3% compared to the same period, respectively. Asia Pacific commissions are generally ad valorem. The strengthening of the U.S. Dollar relative to other major currencies negatively affected Asia Pacific revenue by $0.2 million while having a negligible impact on pre-tax income.

Results of Operations - Three Months Ended September 30, 2009 Compared to Three
Months Ended September 30, 2008



U.S. Operations



                                            Three Months Ended
                                              September 30,
$ in thousands                             2009             2008          Change      % Change
Revenues
Commissions and fees                  $        95,068    $   121,178    $  (26,110 )        (22 )
Recurring                                      17,187         20,505        (3,318 )        (16 )
Other                                           2,392           (570 )       2,962           na
Total revenues                                114,647        141,113       (26,466 )        (19 )

Expenses
Compensation and employee benefits             38,104         46,629        (8,525 )        (18 )
Transaction processing                         13,496         11,680         1,816           16
Other expenses                                 35,749         38,568        (2,819 )         (7 )
Interest expense                                  407          1,637        (1,230 )        (75 )
Total expenses                                 87,756         98,514       (10,758 )        (11 )
Income before income tax expense      $        26,891    $    42,599    $  (15,708 )        (37 )
Pre-tax margin                                   23.5 %         30.2 %        (6.7 )%

The decline in U.S. commission and fee revenues can be principally attributed to a shift in the customer/product mix and resultant lower average commission rates, as well as the current uncertain market conditions.

                                        Three Months Ended September 30,
U.S. Operations: Key Indicators*           2009                  2008             Change        % Change
Total trading volume (in billions
of shares)                                        11.5                  13.9           (2.4 )         (17 )
Trading volume per day (in
millions of shares)                              180.0                 217.6          (37.6 )         (17 )
Average revenue per share ($)        $          0.0068     $          0.0079    $   (0.0011 )         (14 )
U.S. market trading days                            64                    64              -             -

Our trading volumes decreased by 17% in the third quarter of 2009 compared to the same period in 2008. The trend from previous quarters continued, with no clear sign yet of an upturn in fund flows to our core customer base of active managers. These are typically long-only institutional clients with the greatest propensity to use our higher commission products. In contrast, we saw a larger proportion of our business activity coming from our lower margin direct market access

and index fund clients, which caused our overall average commission rate to decline. Somewhat offsetting the lower margin customer mix, commission and fee revenues benefited from growth in our ITG Derivatives and spread-based trading businesses.

Compounding the effect of customer mix, transaction processing costs were higher due to increased activity in our options trading business (where transaction processing costs are higher than our core equity business), increases in securities borrowing fees and SEC transaction fees ("section 31 fees").

Recurring revenues declined following our realignment of certain management responsibilities for international activities related to our Order Management System ("OMS") and ITG Net businesses, as we assigned the relevant customer agreements to our European business in October 2008. This resulted in the transfer of revenues and associated costs related to those clients to our European segment.

Other revenues reflect lower client accommodations and higher stock borrow revenues, partially offset by lower investment income in the current low interest rate environment.

Compensation and employee benefits costs declined 18% as lower headcount, including the transfer of OMS and ITG Net staff to our European Operations, reduced performance-based compensation levels and higher capitalized compensation costs related to our continued focus on product development were slightly offset by higher share-based compensation expenses.

Other expenses reflect savings achieved in business development, consulting and market data expenses offset by higher amortization expense related to new product releases.

Interest expense declined significantly due to a lower outstanding balance on our long term debt, as well as the significantly lower LIBOR interest rates. Additionally, our interest rate swaps (described in Note 3, Derivative Instruments, to the condensed consolidated financial statements), which were economically unfavorable due to the drop in interest rates after their inception in 2006, expired on March 31, 2009.

Canadian Operations



                                         Three Months Ended September 30,
$ in thousands                              2009                  2008             Change      % Change
Revenues
Commissions and fees                  $          13,269     $          16,246    $   (2,977 )        (18 )
Recurring                                           699                   411           288           70
Other                                             1,735                 4,432        (2,697 )        (61 )
Total revenues                                   15,703                21,089        (5,386 )        (26 )

Expenses
Compensation and employee benefits                4,045                 5,915        (1,870 )        (32 )
Transaction processing                            3,325                 3,485          (160 )         (5 )
Other expenses                                    4,438                 4,918          (480 )        (10 )
Total expenses                                   11,808                14,318        (2,510 )        (18 )
Income before income tax expense      $           3,895     $           6,771    $   (2,876 )        (42 )
Pre-tax margin                                     24.8 %                32.1 %        (7.3 )%

Canadian commission and fee revenues decreased as a result of an unfavorable exchange rate impact and lower TSX volume in the segment of the market that forms our core client base. Electronic liquidity providers, which drove the 10% increase in overall TSX volume, are generally not a component of our client base. Excluding the estimated volume attributable to the TSX's incentive program for these electronic liquidity providers, volume declined approximately 18%. Interlisted arbitrage trading, which accounts for most of our other revenues, generated $1.8 million in the third quarter of 2009, significantly down from the $4.4 million achieved in the comparable 2008 quarter due to a decrease in Canadian and U.S. interlisted trading volumes and an increase in competition in this area.

Total operating expenses of $11.8 million were down 18% in the third quarter of 2009 and included a favorable exchange rate impact of $0.6 million resulting from a weaker Canadian Dollar.

Compensation and employee benefits expense were lower as reduced performance-based compensation, increases in capitalized compensation costs and favorable exchange rates more than offset increases in salary and share-based compensation expenses.

Transaction processing costs declined at a slower pace than the related commission revenues as a greater proportion of our trades were executed on the TSX as liquidity takers rather than as liquidity providers, which is more costly.

Other expenses reflect decreases in consulting and business development costs, a favorable exchange rate impact and improved receivables collections.

Overall, currency translation reduced total revenues and pre-tax income by $0.8 million and $0.2 million, respectively.

European Operations



                                       Three Months Ended September 30,
$ in thousands                            2009                  2008             Change      % Change
Revenues
Commissions and fees                $          15,290     $          17,929    $   (2,639 )        (15 )
Recurring                                       4,160                 1,015         3,145          310
Other                                            (106 )                (297 )         191           64
Total revenues                                 19,344                18,647           697            4

Expenses
Compensation and employee
benefits                                        8,960                 7,834         1,126           14
Transaction processing                          5,283                 8,002        (2,719 )        (34 )
Other expenses                                  3,610                 4,261          (651 )        (15 )
Total expenses                                 17,853                20,097        (2,244 )        (11 )
Income / (loss) before income
tax expense                         $           1,491     $          (1,450 )  $    2,941          203
Pre-tax margin                                    7.7 %                (7.8 )%       15.5 %

European commissions continue to be adversely affected by lower market volumes and share prices compared to the prior year quarter. Although European share prices have started to recover from the lows at the start of the year, they continue to lag behind prior year levels, thereby lowering our commission revenue base.

European commission revenues fell $2.6 million, with an unfavorable currency translation effect of $2.3 million representing approximately 90% of the decline. Our POSIT business had a very strong quarter due to the success of POSIT Alert and internalizing initiatives, while the increased focus on revenues generated by our trading desk also contributed positively to our revenue performance.

Recurring revenues reflect the transfer of certain OMS and ITG Net customers from our U.S. Operations and higher analytical product revenue.

Transaction processing cost savings outpaced the decline in commission revenue as a larger share of executions took place on venues such as POSIT or other Multilateral Trading Facilities ("MTFs"), where execution costs are generally lower than on traditional exchanges.

Compensation and employee benefits costs were higher following the transfer of certain OMS and ITG Net support staff to Europe and the continued investment in staff to support the growing business and diversified product range. These additional costs were partially offset by favorable currency translations.

Other expenses reflect savings achieved through aggressive cost control and collection efforts, as well as foreign currency transaction gains. These savings were offset by incremental costs relating to investment in new products, infrastructure and markets.

Overall, foreign currency translation decreased our European Operations revenues by $3.0 million, with a minimal effect on pre-tax income.

Asia Pacific Operations



                                        Three Months Ended September 30,
$ in thousands                             2009                 2008            Change      % Change
Revenues
Commissions and fees                  $         8,442      $         6,730    $    1,712           25
Recurring                                          99                   27            72          267
Other                                             203                  672          (469 )        (70 )
Total revenues                                  8,744                7,429         1,315           18

Expenses
Compensation and employee benefits              5,649                4,262         1,387           33
Transaction processing                          2,100                1,254           846           67
Other expenses                                  5,238                4,269           969           23
Total expenses                                 12,987                9,785         3,202           33
Loss before income tax expense        $        (4,243 )    $        (2,356 )  $   (1,887 )        (80 )
Pre-tax margin                                  (48.5 )%             (31.7 )%      (16.8 )%

As Asia Pacific equity markets continued their rally in the third quarter of 2009, ITG's market share in our major Asia Pacific markets also continued to grow. The algorithmic and direct market access businesses were the main drivers of this growth along with contributions from our trading desk.

Transaction processing costs outpaced the percentage growth in commission revenues as a higher proportion of trades were executed in Japan and Korea, where clearing costs are significantly higher than in the Hong Kong and Australia markets where we self-clear our trades.

Increases in compensation and employee benefits reflect our ongoing investment to establish the infrastructure, staffing and sales trading team necessary to continue to grow our business in this region. Specifically, this investment included an increased staffing level required to support the growing self-directed trading businesses, a greater emphasis on our trading desk and the hiring of a regional manager.

Other expenses reflect higher costs for exchange data and additional connectivity fees related to business growth, and unrealized foreign currency transaction losses.

Overall, currency translation reduced our Asia Pacific Operations revenues by $0.2 million, with minimal impact on our pre-tax income.

Income taxes

Our effective tax rate was 37.7% in the third quarter of 2009 compared to 40.4% in the third quarter of 2008. During the third quarter of 2009, we resolved uncertain tax positions in the U.S. pertaining to the 2002-2004 tax years. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings.

Results of Operations - Nine Months Ended September 30, 2009 Compared to Nine
Months Ended September 30, 2008



U.S. Operations



                                        Nine Months Ended September 30,
$ in thousands                              2009                2008            Change      % Change
Revenues
Commissions and fees                  $        299,811    $        362,351    $  (62,540 )        (17 )
Recurring                                       52,497              62,042        (9,545 )        (15 )
Other                                            1,676               2,800        (1,124 )        (40 )
Total revenues                                 353,984             427,193       (73,209 )        (17 )

Expenses
Compensation and employee benefits             120,429             141,684       (21,255 )        (15 )
Transaction processing                          40,579              33,583         6,996           21
Other expenses                                 109,185             109,685          (500 )          -
Interest expense                                 2,220               5,593        (3,373 )        (60 )
Total expenses                                 272,413             290,545       (18,132 )         (6 )
Income before income tax expense      $         81,571    $        136,648    $  (55,077 )        (40 )
Pre-tax margin                                    23.0 %              32.0 %        (9.0 )%

The decline in U.S. commission and fee revenues can be principally attributed to a shift in the customer/product mix, and resultant lower average commission rates, as well as the current uncertain economic environment.

                                         Nine Months Ended September 30,
U.S. Operations: Key Indicators*           2009                  2008             Change        % Change
Total trading volume (in billions
of shares)                                        36.9                  39.7           (2.8 )          (7 )
Trading volume per day (in
millions of shares)                              196.4                 209.8          (13.4 )          (6 )
Average revenue per share ($)        $          0.0068     $          0.0083    $   (0.0015 )         (18 )
U.S. market trading days                           188                   189             (1 )          (1 )

Our trading volumes decreased 7% in the first nine months of 2009 compared to the same period in 2008. The extraordinarily high net outflows from equity mutual funds in the latter months of 2008 abated somewhat in the first quarter of 2009, however inflows into the active money managers that form our core client base remain significantly below historical levels. These are typically long-only institutional clients with the greatest propensity to use our higher commission products. In contrast, we saw a larger proportion of our business activity coming from our lower margin direct market access and index fund clients which caused our overall average commission rate to decline. Commission and fee revenues also benefited from growth in our ITG Derivatives and spread-based trading businesses.

Transaction processing costs rose as we experienced higher activity in our options trading business (where transaction processing costs are higher than our core equity business), increases in securities borrowing fees and section 31 fees.

Recurring revenues declined following our realignment of certain management responsibilities for international activities related to our OMS and ITG Net businesses, as we assigned the relevant customer agreements to our European business on October 1, 2008. This resulted in the transfer of revenues and associated costs related to those clients to our European Operations. A decrease in the number of ITG Net connections and subscription income from our analytical product sales also contributed to the decline.

Other revenues reflect lower investment income (due to significantly lower . . .