This discussion should be read and evaluated in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of TradeStation Group and its subsidiaries contained in this report and with the issues, uncertainties and risk factors related to our business and industry described in "ITEM 1A. RISK FACTORS" of PART I of the Annual Report on Form 10-K of TradeStation Group for the year ended December 31, 2008 and "ITEM 1A. RISK FACTORS" of PART II of this report. The results of operations for an interim period are not necessarily indicative of results for the year, or for any subsequent period.

Overview and Recent Developments

TradeStation Securities (Member NYSE, FINRA, SIPC, NSCC, DTC, OCC & NFA) is a licensed securities broker-dealer and a registered futures commission merchant, and also a member of the Boston Options Exchange, Chicago Board Options Exchange, Chicago Stock Exchange, International Securities Exchange and NASDAQ OMX. TradeStation Securities' business is also subject to the rules and requirements of the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and state regulatory authorities (the firm is registered to conduct its brokerage business in all 50 states and the District of Columbia). TradeStation Securities self-clears most of its equities and equity and index options business, and uses an established futures clearing firm and an established forex dealer firm to clear its futures and forex business.

TradeStation Securities' revenues consist primarily of transactional commissions and fees (including monthly platform fees), and interest derived from customer balances and margin lending to customers.

As of September 30, 2009, TradeStation Securities had 45,569 equities, futures and forex accounts (the vast majority of which were equities and futures accounts), a net increase of 647 accounts, or 1%, when compared to 44,922 accounts as of June 30, 2009, and a net increase of 4,152 accounts, or 10%, when compared to 41,417 accounts as of September 30, 2008. A brokerage account is defined as an account that either has a positive asset balance of at least $200 or has had activity within the past 180 days. In other words, an account is deemed inactive and is not included in counting total brokerage accounts if it has had less than a $200 balance and has had no activity within the past 180 days.

During the three and nine months ended September 30, 2009, TradeStation Securities' brokerage customer accounts had 79,577 and 94,064 daily average revenue trades (often called "DARTs"), respectively, a decrease of 27% and 9% when compared to 108,507 and 102,834 DARTs during the three and nine months ended September 30, 2008. The following table presents certain brokerage metrics and account information:

                                                  For the Three                      For the Nine
                                                  Months Ended                       Months Ended
                                                  September 30,                      September 30,
                                                                   %                                  %
                                            2009       2008      Change        2009       2008      Change
Daily average revenue trades (DARTs)        79,577     108,507      (27 )      94,064     102,834       (9 )

Self-clearing Client Balances
Average equities client credit balances
(millions)                                $    831   $     650       28      $    766   $     622       23
Average equities client margin balances
(millions)                                $     37   $      88      (58 )    $     33   $      89      (63 )

Client Trading Activity - Per Account
Annualized trades                              445         667      (33 )         536         656      (18 )
Annualized average net revenue per
account                                   $  2,614   $   3,776      (31 )    $  2,912   $   3,749      (22 )




                                                 As of September 30,
                                                                           %
                                                  2009          2008     Change
       Client Account Information

       Total brokerage accounts                     45,569      41,417       10
       Average assets per account - equities   $    67,800    $ 66,000        3
       Average assets per account - futures    $    19,000    $ 20,000       (5 )

We compute DARTs as follows: For equities and equity and index options, a revenue trade included to calculate DARTs is a commissionable trade order placed by the customer and executed, regardless of the number of shares or contracts included in the trade order. For futures and forex, a revenue trade included to calculate DARTs is one round-turn commissionable futures contract traded, or one round-turn lot (or forex deal) traded, regardless of the number of individual orders made and executed (i.e., one futures or forex order may contain numerous contracts or deals, but each round-turn contract and deal is counted as a separate revenue trade). When viewing our DARTs, it should be taken into account that, for equities and equity and index options, we charge most of our commissions based on share volume and number of contracts traded (and not by revenue trade used to calculate DARTs). For futures and forex, we charge commissions on a per contract or per lot basis (so each futures or forex revenue trade included to calculate DARTs represents a round-turn commissionable contract or round turn-lot traded). All DARTs are not equal. The revenue and gross profit margin (brokerage commissions and fees less clearing and execution expenses as a percentage of brokerage commissions and fees) we derive from each revenue trade depends on the asset in question (equities, equity and index options, futures, forex - each has a different per unit revenue structure and cost structure) and, within each asset class, revenue and gross profit margin per equity, contract or deal varies to the extent higher volume traders receive more favorable pricing, which they often do.

TradeStation Technologies owns all of our intellectual property. TradeStation Technologies also provides subscription services for TradeStation. The subscription version of TradeStation is an institutional-quality service that offers strategy trading software tools that generate real-time buy and sell alerts based upon the subscriber's programmed strategies or available third-party strategies, but does not include order execution or other brokerage services. Subscribers are charged a monthly subscription fee.

Our United Kingdom subsidiary, TradeStation Europe, is authorized by the United Kingdom's FSA to act as an introducing brokerage firm in the United Kingdom. In February 2007, TradeStation Europe obtained a "passport" pursuant to which TradeStation

Europe is considered registered, via its FSA authorization, to conduct business throughout the European Economic Area. TradeStation Europe's operations currently consist of the solicitation and introduction of suitable European brokerage clients to its US affiliate (TradeStation Securities) for equities, options, futures and forex account services. As of September 30, 2009, and through the date of the filing of this report, TradeStation Europe's operations and net assets are not considered to be material to our consolidated financial statements.

In September 2009, TradeStation Securities launched its new TradeStation Prime Services division. This new division will seek to fill the growing need of start-up to mid-sized hedge funds, registered investment advisers, professional traders and asset managers for quality prime brokerage services that are no longer being provided by the larger firms that traditionally served this market segment. TradeStation Prime Services intends to provide execution platforms, including TradeStation, clearance and settlement of trades, and a variety of services, including start-up assistance, outsourced/direct access trading, real-time risk management, portfolio reporting, securities lending, commission sharing agreements and capital introductions for its clients.

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Our significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The following significant accounting policy should be considered in addition to those included in our Annual Report on Form 10-K for the year ended December 31, 2008: Investments - Our investments in marketable securities are carried at fair value and are designated as available-for-sale, except for securities owned by the Company's broker-dealer subsidiary, TradeStation Securities, which are accounted for as trading investments. Unrealized gains and losses on available-for-sale investments, net of deferred income taxes, are reflected as accumulated other comprehensive income. Realized gains and losses on available-for-sale investments are determined on the specific identification method and are reflected on the Consolidated Statements of Income. Unrealized gains and losses on securities accounted for as trading investments are reflected on the Consolidated Statements of Income. Declines in fair value of investments that are considered other than temporary are accounted for as realized losses.

The following areas are particularly subject to management's judgments and estimates or are key components of our results of operations, and actual differences could materially affect our consolidated results of operations and financial position: Brokerage Commissions and Fees, Net Interest Income, Income Taxes, and Uninsured Loss Reserves. These areas are discussed in further detail under the heading "Critical Accounting Policies and Estimates" in ITEM 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

For the three and nine months ended September 30, 2009 and 2008, we operated in two principal business segments: (i) brokerage services and (ii) software products and services. The brokerage services segment represents the operations of TradeStation Securities and TradeStation Europe Limited and the software products and services segment represents the operations of TradeStation Technologies. We ceased marketing our legacy software products and subscription software services in 2000. Our primary sources of consolidated revenue are currently generated from the brokerage services segment, and the brokerage services segment should continue to produce most of our revenues for the foreseeable future. After elimination of intercompany charges, for the three and nine months ended September 30, 2009, the brokerage services segment accounted for approximately 93% of our consolidated net revenues and for the three and nine months ended September 30, 2008, the brokerage services segment accounted for approximately 94% of our consolidated net revenues. Given the size of that percentage, other than our discussion and table in Note 13 - SEGMENT AND RELATED INFORMATION in ITEM 1. FINANCIAL STATEMENTS of PART I of this report, we will discuss our results of operations for the overall company instead of on a segmented basis. The following table presents, for the periods indicated, our consolidated statements of income data and presentation of that data as a percentage of change from period to period (unaudited):

                                           For the Three Months Ended September 30,                 For the Nine Months Ended September 30,
                                                                           Change                                                   Change
                                         2009           2008             $            %            2009            2008           $           %
                                              (In thousands, except percentages)                       (In thousands, except percentages)
Revenues:
Brokerage commissions and fees        $    28,623    $    33,455    $    (4,832 )     (14 )    $     93,422    $     92,207   $   1,215         1

Interest income                             1,612          6,967         (5,355 )     (77 )           3,948          23,305     (19,357 )     (83 )
Brokerage interest expense                      -            682           (682 )    (100 )               -           2,753      (2,753 )    (100 )

Net interest income                         1,612          6,285         (4,673 )     (74 )           3,948          20,552     (16,604 )     (81 )

Subscription fees and other                 2,121          2,030             91         4             6,153           6,290        (137 )      (2 )


Net revenues                               32,356         41,770         (9,414 )     (23 )         103,523         119,049     (15,526 )     (13 )


Expenses:
Employee compensation and benefits         10,509          9,852            657         7            31,662          29,898       1,764         6
Clearing and execution                      7,160         10,159         (2,999 )     (30 )          23,822          28,195      (4,373 )     (16 )
Data centers and communications             2,902          2,170            732        34             8,551           6,930       1,621        23
Marketing                                   1,453          1,535            (82 )      (5 )           5,046           4,323         723        17
Professional services                         754            643            111        17             2,514           2,431          83         3
Occupancy and equipment                       800            775             25         3             2,282           2,282           0         0
Depreciation and amortization               1,062          1,076            (14 )      (1 )           3,306           3,108         198         6
Other                                       1,653          1,553            100         6             4,862           4,355         507        12


Total expenses                             26,293         27,763         (1,470 )      (5 )          82,045          81,522         523         1


Income before income taxes                  6,063         14,007         (7,944 )     (57 )          21,478          37,527     (16,049 )     (43 )

Income tax provision                        2,366          5,328         (2,962 )     (56 )           8,420          14,506      (6,086 )     (42 )


Net income                            $     3,697    $     8,679    $    (4,982 )     (57 )    $     13,058    $     23,021   $  (9,963 )     (43 )

Three Months Ended September 30, 2009 and 2008

Net revenues were $32.4 million for the three months ended September 30, 2009, as compared to $41.8 million for the three months ended September 30, 2008, a decrease of $9.4 million, or 23%. The primary reasons for this decline were decreased brokerage commissions and fees of $4.8 million, or 14%, as a result, we believe, of lower market volatility and a $4.7 million, or 74%, decrease in net interest income, due primarily to decreases in interest rates and, to a lesser extent, reduced receivables from brokerage customers (margin balances).

Net income was approximately $3.7 million for the three months ended September 30, 2009, as compared to $8.7 million for the three months ended September 30, 2008, a decrease of $5.0 million, or 57%. The decrease resulted primarily from decreases of $4.8 million, or 14%, in brokerage commissions and fees and $4.7 million, or 74%, in net interest income, partially offset by a $3.0 million, or 30%, decrease in clearing and execution costs.

Income before income taxes was $6.1 million (19% of net revenues) for the three months ended September 30, 2009, as compared to $14.0 million (34% of net revenues) for the three months ended September 30, 2008, a decrease of $7.9 million, or 57%. Our $7.9 million decrease in income before income taxes was due primarily to decreases in brokerage commissions and fees of $4.8 million and in net interest income of $4.7 million, a $657,000 increase in employee compensation and benefits, and increased data centers and communications costs of $732,000, partially offset by decreased clearing and execution costs of $3.0 million. Our pre-tax margin (income before income taxes divided by net revenues) decreased from 34% to 19% due primarily to the decrease in brokerage commissions and fees and net interest income, increases in employee compensation and benefits, which resulted from increased employee headcount (mostly in our product development departments), and increases in data centers and communications costs, partially offset by decreased clearing and execution costs.

During the three months ended September 30, 2009, we recorded an income tax provision of $2.4 million based upon our current estimated annual effective income tax rate of approximately 39%. During the three months ended September 30, 2008, we recorded an income tax provision of $5.3 million based upon our then-estimated annual effective income tax rate of approximately 39%. See Income Taxes below.

Revenues

Brokerage Commissions and Fees - Brokerage commissions and fees consist of commissions for equities, futures and forex transactions and, to a lesser extent, monthly platform and other fees earned from brokerage customers using the TradeStation online trading platform. For the three months ended September 30, 2009, brokerage commissions and fees were approximately $28.6 million, as compared to $33.5 million for the three months ended September 30, 2008. This $4.8 million, or 14%, decrease was due primarily to decreased brokerage commissions of $6.0 million from lower trading volume related mostly, we believe, to lower market volatility during the 2009 third quarter as compared to the 2008 third quarter (generally, as market volatility decreases our customer accounts' trade volume decreases, and there was an upward spike in volatility during September 2008), partially offset by an increase in forex revenue of $618,000 resulting from more favorable terms achieved through the improvement of our forex contract with our clearing agent and a $392,000 increase in platform fees. We continuously review and assess our pricing, which includes commissions and platform and other fees, and we may adjust such fees from time to time in response to competitive pressures if and when they arise or as strategic pricing initiatives.

Interest Income - Interest income consists of interest earned from self-clearing operations (primarily, interest earned on brokerage customer cash balances and interest earned from brokerage customer margin lending balances), interest revenue-sharing arrangements with clearing agent firms, and interest or income from corporate cash and cash equivalents and marketable securities. For the three months ended September 30, 2009, interest income was $1.6 million, as compared to $7.0 million for the three months ended September 30, 2008. This $5.4 million, or 77% decrease, was due primarily to decreases in interest rates and to reduced interest on receivables from brokerage customers (interest on margin balances). During the 2009 second quarter, the Company reallocated most of its investments to U.S. Treasury Bills and, to a lesser extent, money market funds that invest primarily in U.S. Treasury Bills (collectively, "US Treasury Investments"). As a result, the Company's interest income is now affected principally by the yields obtained from such investments. The Company's interest income has historically been dependent upon the federal funds daily effective rate and the federal funds target rate of interest, but now, since the shift to US Treasury Investments, only the federal funds target rate of interest for futures account interest-sharing is relevant. Historically, the weighted average rate of interest for equities accounts was based upon the federal funds daily effective rate of interest and, for futures accounts, was based (and continues to be based) on the federal funds target rate of interest. We estimate, based on the size and nature of our customer assets as of September 30, 2009 (and assuming for these purposes that the size and nature of our customer assets do not change), that each basis point increase or decrease in the US Treasury Investments yield (based upon the tenor of the US Treasury Investments) and, to a lesser extent, the federal funds target rate of interest will impact our annual net income by approximately $68,000. The average federal funds target rate of interest was approximately 0% and 2.0% during the three months ended September 30, 2009 and 2008, respectively. Interest income for future periods may be materially affected by: changes in the US Treasury Investments yield and, to a lesser extent, the federal funds target rate of interest and the extent, if any, to which our customer cash account balances and/or margin lending balances increase or decrease; any decisions we may make to provide more or less favorable debit or credit interest rates to our customers; and whether we convert our futures clearing relationship to an omnibus clearing arrangement (which we are seeking to do), in which case our clearing firm will no longer receive a share of interest income from our futures customer accounts and the yield may no longer be tied to the federal funds target rate of interest.

Brokerage Interest Expense - Brokerage interest expense consists of amounts paid or payable to brokerage customers based on credit balances maintained in brokerage accounts and other brokerage-related interest expense. Brokerage interest expense does not

include interest on company borrowings, which, if any, would be included in Expenses - Other below. During the three months ended September 30, 2009, the average annual credit interest rate paid to our equities customers was 0%, as compared to 0.50% during the three months ended September 30, 2008, and we only pay interest, if at all, for the portion of cash balances in each account over $10,000. Futures and forex customers are not paid interest on the cash balances in their accounts. As a result of the zero interest rate, we did not incur any brokerage interest expense during the three months ended September 30, 2009. Brokerage interest expense was approximately $682,000 during the three months ended September 30, 2008. Factors that could affect brokerage interest expense in the future include: the growth (if any) and mix of business in our brokerage customer base among equities, futures and forex; average assets per account and the portion of account assets held in cash; and future decisions concerning credit or debit interest rates offered to our equities, futures and forex customers (as a result of changes in short-term interest rates or for other business reasons).

Subscription Fees and Other - Subscription fees and other revenues consist of, primarily, monthly fees earned for providing streaming real-time, Internet-based trading analysis software tools and market data services to non-brokerage customers and, to a lesser extent, fees for our training workshops that help customers take fuller advantage of the features and functions of the TradeStation electronic trading platform, direct sales of our legacy customer software products and royalties and similar fees received from third parties whose customers use our legacy software products. For the three months ended September 30, 2009, subscription fees and other revenues were approximately $2.1 million, as compared to $2.0 million during the three months ended September 30, 2008. The amount of subscription fees in the future will depend upon the number of subscription terminations and the number of new subscriptions each month. Subscription services and legacy customer software products have not been actively marketed in the U.S. since 2000, so it is expected that subscription terminations will exceed new subscriptions.

Expenses

Employee Compensation and Benefits - Employee compensation and benefits expenses consist primarily of employee salaries, sales commissions and bonuses, stock-based compensation and, to a lesser extent, payroll taxes, employee benefits (including group health insurance and employer contributions to benefit programs), recruitment, temporary employee services and other related employee costs. Employee compensation and benefits expenses were $10.5 million for the three months ended September 30, 2009, as compared to $9.9 million for the three months ended September 30, 2008, an increase of approximately $657,000, or 7%. This increase was due primarily to increases in wages paid to employees of $984,000, due primarily to increased headcount (mostly in our product development departments), partially offset by decreased commissions of $263,000, due primarily to reduced trading volume. During the three months ended September 30, 2009, there was an average of 395 full-time equivalent employees, as compared to 341 full-time equivalent employees during the three months ended September 30, 2008. Employee compensation and benefits expenses are anticipated to increase during the remainder of 2009 as a result of recent and planned additions to employee headcount (primarily in our product development departments and in our new TradeStation Prime Services division).

Clearing and Execution - Clearing and execution expenses include the costs associated with executing and clearing customer trades, including fees paid to clearing agents and clearing organizations, exchanges and other market centers, fees and royalties paid for the licensing of self-clearing, back-office software systems and related services, and commissions paid to third-party broker-dealers. Clearing and execution expenses were approximately $7.2 million for the three months ended September 30, 2009, as compared to $10.2 million for the three months ended September 30, 2008, a decrease of approximately $3.0 million, or 30%. The decrease in clearing and execution expenses, which as a percentage of brokerage commissions and fees decreased to 25% during the three months ended September 30, 2009, as compared to 30% during the three months ended September 30, 2008, was primarily a result of a change in our mix of business among asset classes.

Data Centers and Communications - Data centers and communications expenses consist of: (i) data communications costs necessary to connect our server farms directly to electronic marketplaces, data sources and to each other; (ii) data communications costs and rack space at our facilities where the data server farms are located; (iii) data distribution and exchange fees; and
(iv) telephone, Internet and other communications costs. Data centers and communications expenses were $2.9 million for the three months ended September 30, 2009, as compared to $2.2 million for the three months ended September 30, 2008, an increase of $732,000, or 34%. This increase was due . . .