The following discussion should be read together with the accompanying Condensed Consolidated Financial Statements and notes thereto.

Overview

We are a pioneer in electronic trading solutions. The NYFIX Marketplace is a global community of trading counterparties utilizing innovative services that optimize the business of trading, including trade messaging services, trade messaging software and trading workstations. NYFIX Millennium provides the NYFIX Marketplace with enhanced methods of accessing liquidity. We also provide value-added informational and analytic services and tools for measuring execution quality. As a trusted business partner and service provider to investment managers, mutual fund, pension fund and hedge fund managers (the "Buy-Side") and brokerage firms and banks (the "Sell-Side"), NYFIX enables low touch, low impact market access and transaction processing.

We operate businesses that design, produce and sell technology-based products and services to professional financial services organizations that are engaged in trading activities including traditional asset management (including the trading of those assets), proprietary trading, and/or the handling of client orders in the U.S. and international securities markets.

Many of our products and services utilize the FIX Protocol which is a messaging standard developed specifically for real-time electronic exchange of securities trading information.

We believe our innovative NYFIX products and services deliver value-added improvements in speed, quality of execution and cost efficiency by automating both the work flows at the user work station level and the interactive process of transmitting and executing orders between the Buy-Side and the Sell-Side, and through exchanges (e.g., NYSE, NYSE Amex, NASDAQ and other exchanges), the over-the-counter market ("OTC"), alternate trading systems ("ATSs") and electronic communication networks ("ECNs").

Sources of Revenue

Our revenues consist of subscription and maintenance fees, transaction fees, and product sales and services revenues. As a percentage of our total revenues during the nine months ended September 30, 2009, subscription and maintenance revenues accounted for 70%, transaction revenue accounted for 28%, and product sales and services revenue accounted for 2%.

Our subscription and maintenance revenues principally consist of revenues from contracts that provide for the use of our systems and our messaging channels, together with managed services. Subscription and maintenance revenue rates are fixed based on a contractual period of time. Additional services, provided under schedules, or addenda to the contracts, have provisions similar to the original contract. Under the terms of the subscription contracts and addenda, clients are typically invoiced a flat periodic charge after initial installation and acceptance. Subscription and maintenance also includes maintenance contracts for software under separate, renewable maintenance contracts. Software related maintenance contracts are generally for a term of one year. Revenue related to these contracts and addenda is recognized over the term of the contract, addendum, or service period, on a straight-line basis. We include within our subscription and maintenance revenue amounts we charge for connectivity to the NYFIX Marketplace Platform, including telecommunications, installation and maintenance of routers, network management software, support staff, and other costs related to the management of connectivity. The connectivity charges are recognized as the services are provided.

Our subscription and maintenance revenues are not directly affected by trading volumes; however, trading volumes do affect the revenues of our clients and this could affect their future purchases of our technology and services. Pricing pressures due to competition, failure to maintain revenues with existing clients and to sign agreements with new clients because of reductions in their technology spending, consolidation of brokerages and hedge fund closures could affect our revenues and profitability. Our costs associated with supporting the subscription and maintenance agreements are generally fixed and thus a loss of revenue would disproportionately impact profitability.

Transaction revenue primarily consists of per-share commissions charged to clients who send and receive a match and execution in our NYFIX Millennium ATS and clients to whom we provide execution and smart order routing technology, gateways to access markets and algorithmic trading ability in: (i) their own name, (ii) a third-party name, or (iii) our name. Revenue for these services is generally invoiced monthly in arrears or is obtained through the clearing process within three days of the trade date, and is recognized on a trade date basis, in the period in which it is earned. Transaction revenue also includes the net interest spread on our matched book of securities borrowed/loaned.

Because commission revenues 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 the U.K. and (ii) our commission rates. Commission revenues are primarily generated by orders delivered to us from direct computer-to-computer links driven by our clients' routing technology, our FIXTrader order management system and other vendors' products, as well as third-party order routing networks and phone orders from our customers.

We believe that the factors that most influence our transaction volumes are the following:

· macro trends in the global equities markets that affect overall institutional equity trading activity;

· competitive pressure, including pricing, created by a proliferation of electronic execution competitors;

· potential changes in the U.S. market structure;

· new regulatory requirements or a failure to comply with existing regulatory requirements;

· service quality and availability;

· consolidation of broker-dealers or a decline in the number of hedge funds; and

· increased client demands for bandwidth and speed, requiring reinvestment in hardware and software.

Product sales and services are primarily comprised of FIX software licenses and professional services fees. This revenue is recognized when the software is delivered and accepted by the client and when other contractual obligations, including installation, if applicable, have been satisfied and collection of the resulting receivable is reasonably assured.

Cost of Revenue

Cost of revenue includes the following:

· Data center operating costs, including salaries, related to equipment, infrastructure and software supporting operations and the NYFIX Marketplace;

· Managed connectivity costs, including telecommunication and other costs incurred on behalf of clients, and costs to maintain the data centers, including depreciation and amortization of assets utilized by the data centers, which are recognized as either a cost of subscription and maintenance or cost of transaction revenue, as appropriate;

· Fees paid to third-party technology providers to access and provide services to their client base;

· Amortization expense of acquired intangible assets and capitalized software costs relating to the applicable revenue category;

· Developer and quality assurance personnel labor for client and product support of software products;

· The cost of leased subscription and service bureau equipment, which is depreciated over the estimated useful life of the equipment; and

· Execution and clearing costs to access various markets and exchanges and to process and settle transactions.

Recent Developments

Agreement and Plan of Merger

On August 26, 2009, we entered into an agreement and plan of merger (the "Merger Agreement") with NYSE Technologies, Inc. ("NYSE Technologies"), a wholly-owned subsidiary of NYSE Euronext, which was approved by our stockholders at a special meeting of stockholders on November 3, 2009. The completion of the merger is subject to the satisfaction of certain customary conditions. We currently expect the transaction to close during the fourth quarter of 2009. Following completion of the merger, NYFIX will become a wholly-owned subsidiary of NYSE Technologies, and our common stock will no longer be quoted on Nasdaq or publicly held.

Pursuant to the terms of the Merger Agreement, upon completion of the merger the holders of our common stock will be entitled to receive $1.675 per common share in cash, without interest, and holders of the Series B Preferred Stock will receive $50.134 per preferred share in cash, without interest. The total value of the all cash deal, including payments for employee restricted stock units and the value of in-the-money option awards, is approximately $144 million.

The Merger Agreement was the result of a process that we launched in December 2008. In connection with this process, we incurred strategic initiative costs consisting of advisory fees, legal fees, accounting and tax advisory fees, as well as meeting fees for a special committee of our Board of Directors of $3.3 million and $3.8 million for the three and nine months ended September 30, 2009, respectively. These costs do not include any amounts that are contingent on the consummation of the proposed merger transaction.

For additional background and information about the Merger Agreement and the proposed merger, please see our Definitive Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on September 28, 2009.

Shareholder Litigation

Following the announcement of the Merger Agreement on August 27, 2009, several class action lawsuits purporting to challenge the merger were filed. On October 23, 2009, we entered into a memorandum of understanding to settle these lawsuits. For further information, please see Part II. Item 1, "Legal Proceedings" below.

Euro Millennium

Due to the growth in matched volumes at the end of 2008, we determined that effective January 1, 2009, Euro Millennium is no longer in its introductory phase. Based on this determination, the results for Euro Millennium are being presented as part of the Transaction Services Division with specific costs included in transaction cost of revenue and the various SG&A categories.

The following table presents our consolidated results of operations for the periods indicated. These consolidated results of operations are not necessarily indicative of the consolidated results of operations that will be achieved in any future period.

                                                  Three Months Ended September 30,                                 Nine Months Ended September 30,
                                                        % of                           % of                             % of                           % of
(in thousands, except percentages)      2009           revenue          2008          revenue            2009          revenue          2008          revenue
Revenue:
Subscription and maintenance         $    18,725          72%        $   17,747          61%          $   54,893          70%        $   52,772          59%
Transaction                                6,903          27%            10,842          37%              22,108          28%            34,941          39%
Product sales and services                   280           1%               586           2%               1,382           2%             1,491           2%
Total revenue                             25,908          100%           29,175          100%             78,383          100%           89,204          100%
Cost of revenue:
Subscription and maintenance (1)           6,916          27%             7,985          27%              21,389          27%            23,457          26%
Transaction (1)                            7,739          30%             5,595          19%              21,819          28%            17,649          20%
Product sales and services (1)                22           0%                86           0%                  79           0%               254           0%
Total cost of revenue                     14,677          57%            13,666          47%              43,287          55%            41,360          46%
Gross profit                              11,231          43%            15,509          53%              35,096          45%            47,844          54%
Operating expense:
Selling, general and
administrative (1)                        13,402          52%            18,251          63%              41,659          53%            58,871          66%
Strategic initiative costs                 3,317          13%                 -           0%               3,754           5%                 -           0%
Depreciation and amortization                391           2%               471           2%               1,188           2%             1,412           2%
Restructuring charge                           -           0%                 -           0%                 748           1%               216           0%
Integration charges                            -           0%               139           0%                   -           0%               735           1%
SEC investigation, restatement and
related expenses                               -           0%               170           1%                (634 )        -1%               438           0%
Loss from operations                      (5,879 )        -23%           (3,522 )        -12%            (11,619 )        -15%          (13,828 )        -16%
Interest expense                            (197 )        -1%              (123 )         0%                (623 )        -1%              (489 )        -1%
Investment income                             15           0%               251           1%                 143           0%             1,027           1%
Loss before income tax provision          (6,061 )        -23%           (3,394 )        -12%            (12,099 )        -15%          (13,290 )        -15%
Income tax provision                           -           0%               128           0%                   -           0%               383           0%
Net loss                                  (6,061 )        -23%           (3,522 )        -12%            (12,099 )        -15%          (13,673 )        -15%
Accumulated preferred dividends             (433 )        -2%              (827 )        -3%                (890 )        -1%            (2,796 )        -3%
Loss applicable to common
stockholders                         $    (6,494 )        -25%       $   (4,349 )        -15%         $  (12,989 )        -17%       $  (16,469 )        -18%

Percentage sub-totals may not add due to rounding.
(1) Stock-based compensation included in the respective line items above follows:
Cost of revenue:

Subscription and maintenance         $       101                     $       56                       $      285                     $      278
Transaction                                   61                             31                              172                            122
Product sales and services                     2                              1                                6                              5
Selling, general and
administrative                             1,437                          1,530                            4,073                          6,001
                                     $     1,601                     $    1,618                       $    4,536                     $    6,406

Revenue

The following table presents our components of revenue:

                                       Three Months Ended                                       Nine Months Ended
                                          September 30,            Increase (Decrease)            September 30,            Increase (Decrease)
(in thousands, except percentages)      2009          2008            $              %          2009          2008            $              %
Subscription and maintenance         $   18,725     $ 17,747     $        978         6%      $  54,893     $ 52,772     $      2,121         4%
Transaction                               6,903       10,842           (3,939 )      -36%        22,108       34,941          (12,833 )      -37%
Product sales and services                  280          586             (306 )      -52%         1,382        1,491             (109 )      -7%
Total revenue                        $   25,908     $ 29,175     $     (3,267 )      -11%     $  78,383     $ 89,204     $    (10,821 )      -12%

Subscription and Maintenance

The increase in subscription and maintenance revenue for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, reflected the offsetting effects of an increase in subscriptions (and related managed services) of messaging channels offered by our FIX Division, and a decrease in subscriptions (and related managed services) of our OMS Division products. The growth in messaging channels offered by our FIX Division was attributable to an increase in the number of Buy-Side to Sell-Side messaging channels, primarily for order routing, as we continued our efforts to increase the level of business with Buy-Side institutions. As of September 30, 2009, we had 10,114 billable order routing channels in service, an increase of 6% over the 9,569 billable order routing channels in service at September 30, 2008. The decline in subscriptions (and related managed services) of our OMS Division products of $0.2 million, to $0.6 million for the three months ended September 30, 2009 compared to $0.8 million during the three months ended September 30, 2008, was due primarily to cancellations from certain clients. Subscription and maintenance revenue related to software licenses increased $0.2 million to $1.7 million for the three months ended September 30, 2009 as compared to $1.5 million for the same period in 2008.

The increase in subscription and maintenance revenue for the nine months ended September 30, 2009, as compared to the nine months ended September 30, 2008, reflected an increase in subscriptions (and related managed services) of messaging channels offered by our FIX Division and the impact of the FIXCITY acquisition, partially offset by a decrease in subscriptions (and related managed services) of our OMS Division products. The growth in messaging channels offered by our FIX Division was attributable to an increase in the number of Buy-Side to Sell-Side messaging channels, primarily for order routing, as we continued our efforts to increase the level of business with Buy-Side institutions. The decline in subscriptions (and related managed services) of our OMS Division products of $1.7 million, to $2.2 million for the nine months ended September 30, 2009 compared to $3.9 million during the nine months ended September 30, 2008, was due primarily to the discontinuation of our Fusion OMS products, as well as cancellations from other clients. Subscription and maintenance revenue related to software licenses increased $0.6 million to $5.0 million for the nine months ended September 30, 2009 as compared to $4.4 million for the same period in 2008.

Transaction

The decrease in transaction revenue for the three months ended September 30, 2009 was attributable to a decrease in commissions on trade executions. Commissions decreased $3.9 million to $6.7 million during the three months ended September 30, 2009 compared to $10.6 million during three months ended September 30, 2008 due primarily to a $2.9 million and a $1.0 million decrease in commissions from Sell-Side and Buy-Side clients, respectively. The decrease from Sell-Side clients was due to a decrease in matched volumes in NYFIX Millennium and a decrease in direct market access services, offset in part by an increase in the use of the NIX algorithmic and smart routing trading products and $0.8 million of revenue from Euro Millennium, which included $0.6 million of settlement fee revenue. We expect this settlement fee revenue to decline in the fourth quarter of 2009 now that we have migrated certain clients to the SIX X-Clear central counterparty (CCP) clearing solution. The average daily matched volume in NYFIX Millennium during the three months ended September 30, 2009 was 31.4 million shares, a 40% decrease over the average of 52.6 million shares matched during the three months ended September 30, 2008, due primarily to a market-wide decrease in traditional Buy-Side institutional trading volumes that access Millennium through Sell-Side algorithms and due to the increase in competition from the launch of several new dark pools. This increased competition is also expected to put additional pressure on our commission rates. The average daily matched value in Euro Millennium was €61.4 million ($87.7 million). The additional decline in revenue from NYSE DOT direct market access services (including associated pass-through charges) of $0.4 million was primarily attributable to the decline in listed order flow being directed to the NYSE DOT execution system as a result of increased competition from other venues such as Direct Edge, NASDAQ and BATS. The increase in commission from NIX algorithmic and smart routing trading products was due to the integration of our products into other third party order management systems giving us the ability to offer our products to a broader client base.

The decrease from Buy-Side clients was due in part to the disintermediation of our direct Buy-Side client base by third-party algorithmic trading solution providers who offer enhanced technology solutions for certain clients and to a market-wide decrease in traditional Buy-Side institutional trading volumes. Our securities lending business generated net interest spread on its matched book stock borrow/stock loan portfolio of $0.2 million during the three months ended September 30, 2009 compared to $0.3 million during the three months ended September 30, 2008.

The decrease in transaction revenue for the nine months ended September 30, 2009 was attributable to a decrease in commissions on trade executions. Commissions decreased $12.7 million to $21.5 million during the nine months ended September 30, 2009 compared to $34.2 million during nine months ended September 30, 2008 due primarily to a $9.7 million and a $3.0 million decrease in commissions from Sell-Side and Buy-Side clients, respectively. The decrease from Sell-Side clients was due to a decrease in matched volumes in NYFIX Millennium, a decrease in the use of the NIX smart routing trading products and a decrease in direct market access service, offset in part by an increase in the use of the NIX algorithmic trading products and $2.6 million of revenue from Euro Millennium, which included $2.0 million of settlement fee revenue. The decline in revenue from our smart routing trading products and from OTC direct market access was primarily attributable to lower volumes from former Fusion OMS clients. Transaction revenue from former Fusion OMS clients decreased by $2.3 million during the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008. The average daily matched volume in NYFIX Millennium during the nine months ended September 30, 2009 was 32.5 million shares, a 35% decrease over the average of 50.1 million shares matched during the nine months ended September 30, 2008, due primarily to a market-wide decrease in traditional Buy-Side institutional trading volumes that access Millennium through Sell-Side algorithms and due to the increase in competition from the launch of several new dark pools. The additional decline in revenue from NYSE DOT direct market access services (including associated pass-through charges) of $1.5 million was primarily attributable to our decision to improve our margins by eliminating discounts for these services below cost for clients who do not generate valuable pass-through matches in NYFIX Millennium and the decline in listed order flow being directed to the NYSE DOT execution system as a result of increased competition from other venues such as Direct Edge, NASDAQ and BATS. The increase in commission from the NIX algorithmic products was due to the integration of our products into other third-party order management systems, giving us the ability to offer our products to a broader client base.

The decrease from Buy-Side clients was due in part to the disintermediation of our direct Buy-Side client base by third-party algorithmic trading solution providers who offer enhanced technology solutions for certain clients and to a market-wide decrease in traditional Buy-Side institutional trading volumes. Our securities lending business generated net interest spread on its matched book stock borrow/stock loan portfolio of $0.6 million during the nine months ended September 30, 2009 and compared to $0.8 million during the nine months ended September 30, 2008.

Product Sales and Services

The decrease in product sales and services for the three months ended September 30, 2009 compared to the same period in 2008 was primarily due to decreases in software license fee and professional services revenues. Software license fees for our FIX software products decreased $0.2 million to $0.2 million during the three months ended September 30, 2009 compared to $0.4 million for the same period in 2008. Professional services revenue decreased $0.1 million to $0.1 million during the three months ended September 30, 2009 as compared to $0.2 million for the same period in 2008.

The decrease in product sales and services for the nine months ended September 30, 2009 compared to the same period in 2008 was primarily due to a decrease in professional services revenue, partly offset by an increase in software license fee revenue. Professional services revenue decreased $0.3 million to $0.3 million during the nine months ended September 30, 2009 as compared to $0.6 million for the same period in 2008. Software license fees for our FIX software products increased $0.2 million to $1.1 million during the nine months ended September 30, 2009 compared to $0.9 million for the same period in 2008.

Costs and Expenses

Cost of Revenue

The following table presents our cost of revenue:

                                       Three Months Ended                                       Nine Months Ended
                                          September 30,            Increase (Decrease)            September 30,            Increase (Decrease)
(in thousands, except percentages)      2009          2008            $              %          2009          2008            $              %
Subscription and maintenance         $    6,916     $  7,985     $     (1,069 )      -13%     $  21,389     $ 23,457     $     (2,068 )      -9%
Transaction                               7,739        5,595            2,144        38%         21,819       17,649            4,170        24%
Product sales and services                   22           86              (64 )      -74%            79          254             (175 )      -69%
. . .