UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number 0-23644

INVESTMENT TECHNOLOGY GROUP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý   No   o

Indicate by check mark whether the registrant is an accelerated filer (as defined by Exchange Act Rule 12b-2)

Yes   ý   No   o

Indicate by check mark whether the registrant is a shell company (as defined by Exchange Act Rule 12b-2)

Yes   o   No   ý

As of October 31, 2005, the Registrant had 42,229,592 shares of common stock, $0.01 par value, outstanding.

QUARTERLY REPORT ON FORM 10-Q

TABLE OF CONTENTS

Investment Technology Group, ITG, ITG ACE, ITG/Opt, ITG WebAccess, activePeg, AsiaPOSIT, POSIT, EuroPOSIT, ITG Australia, QuantEX, ResRisk, RouteNet, SmartServer, SPI SmartServer, TCA, The Future of Trading, TriAct, Triton, and VWAP SmartServer are registered trademarks or servicemarks of the Investment Technology Group, Inc. companies. AlterNet, Channel ITG, Full Service Direct Market Access, Hoenig, Horizon SmartServer, ITG Japan, ITG PRIME, ITG/Risk, ITG Logic, Logic, Radical, ResRisk+, POSIT Alert, POSIT Match, POSIT Now, and Where Risk Control Meets Cost Control are trademarks or servicemarks of the Investment Technology Group, Inc. companies.

2

FORWARD-LOOKING STATEMENTS

In addition to the historical information contained throughout this Quarterly Report on Form 10-Q, there are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements regarding our expected future financial condition, results of operations, cash flows, dividends, financing plans, business strategies, competitive positions, plans and objectives of management for future operations, and concerning securities markets and economic trends are forward-looking statements. Although we believe our expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, our ability to achieve expected future levels of sales, the actions of both current and potential new competitors, rapid changes in technology, fluctuations in market trading volumes, financial market volatility, evolving industry regulations, risk of errors or malfunctions in our systems or technology, cash flows into or redemptions from equity funds, effects of inflation, customer trading patterns, the success of our new products and services offerings as well as general economic and business conditions, internationally or nationally, securities, credit and financial market conditions, and adverse changes or volatility in interest rates. Certain of these factors, and other factors, are more fully discussed in Management’s Discussion and Analysis of Financial Condition and Results of Operations—Certain Factors That May Affect Our Results of Operations—in our annual report on Form 10-K for the year ended December 31, 2004, which you are encouraged to read. Our 2004 Annual Report to Shareholders and Form 10-K are also available through our website at http://www.itginc.com/investor.

3

PART I.—FINANCIAL INFORMATION

Item 1.         Financial Statements

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
(In thousands, except share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

4

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (unaudited)
(In thousands, except per share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

5

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Changes in Stockholders’ Equity (unaudited)
Nine Months Ended September 30, 2005
(In thousands, except share amounts)

See accompanying notes to unaudited condensed consolidated financial statements.

6

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (unaudited)
(In thousands)

See accompanying notes to unaudited condensed consolidated financial statements.

7

INVESTMENT TECHNOLOGY GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (unaudited)

(1) Organization and Basis of Presentation

Investment Technology Group, Inc. (“ITG”, the “Company”, “we” or “us”) was formed as a Delaware corporation on July 22, 1983. Its principal subsidiaries include: (1) ITG Inc. and AlterNet Securities, Inc. (“AlterNet”), United States (“U.S.”) broker-dealers in equity securities, (2) ITG Execution Services, Inc., a New York Stock Exchange floor broker (“ITG Execution Services”), (3) Investment Technology Group Limited, an institutional broker-dealer in Europe, (4) ITG Australia Limited, an institutional broker-dealer in Australia, (5) ITG Canada Corp., an institutional broker-dealer in Canada, (6) ITG Hoenig Limited, an institutional broker dealer in Hong Kong, (7) ITG Software Solutions, Inc., our intangible property, software development and maintenance subsidiary in the U.S. and (8) ITG Japan Ltd., our start-up business in Japan.

We are a full service trade execution firm that uses technology to increase the effectiveness and lower the cost of trading. We have two reportable segments: U.S. Operations and International Operations. The U.S. Operations segment provides equity trading and research services to institutional investors, brokers and alternative investment funds and money managers in the U.S. The International Operations segment includes our brokerage businesses in Europe, Australia, Canada and Asia (Hong Kong and our start-up business in Japan) as well as a research and development facility in Israel.

The condensed consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the U.S. (“U.S. GAAP”). All material intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements reflect all adjustments, which are in the opinion of management, necessary for the fair presentation of results. Certain reclassifications and format changes have been made to prior period amounts to conform to the current period presentation.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets, liabilities, revenues and expenses. Actual results could differ from those estimates.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures are adequate to make the information presented not misleading. This report should be read in conjunction with our consolidated financial statements and accompanying notes included in our annual report on Form 10-K for the year ended December 31, 2004.

(2) Cash, Restricted or Segregated

Cash, restricted or segregated represents (i) funds on deposit with a bank in Asia for the purpose of securing working capital facilities arising from our Asian clearing and settlement activities, (ii) funds from the consideration paid for Hoenig Group Inc. held in escrow for the benefit of the former Hoenig stockholders, and (iii) a segregated account maintained by ITG Inc.’s clearing broker for the benefit of customers under certain directed brokerage arrangements.

(3) Stock-Based Compensation

At September 30, 2005, we had a stock option plan and employee and non-employee director benefit plans, which are described more fully in Note 17, Employee and Non Employee Director Stock and Benefit Plans, in our annual report on Form 10-K for the year ended December 31, 2004.

Effective January 1, 2003, we adopted the fair value method prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure. We used the prospective adoption method, applying the fair-value accounting method and recognizing compensation expense based on the fair value of stock options and/or restricted stock units granted for fiscal 2003 and future years over the related service period. In December 2004, the Financial Accounting Standards Board issued SFAS No. 123R, Share-Based Payment, which was a revision to SFAS No. 123. As a result, the fair value based method of accounting for stock-based payments will be required on a modified prospective basis, meaning any previously granted but unvested awards will be recorded as an expense on a prorated basis over the remaining vesting period. As we voluntarily adopted the fair value method as of January 1, 2003 on a prospective basis, the impact the revised Statement will have on our results of operations, financial position and cash flows will be minimal. SFAS No. 123R was effective for interim and annual periods beginning after June 15, 2005, with earlier adoption encouraged. However, based on the April 2005 announcement by the Securities and Exchange Commission, we are required to adopt SFAS No. 123R by January 1, 2006.

8

Employee stock options granted prior to 2003 continue to be accounted for under Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, as permitted by SFAS No. 123. In accordance with APB No. 25, compensation expense is not recognized for stock options that have no intrinsic value on the date of grant.

The following table displays pro forma information as if the provisions of SFAS No. 123 had been applied to all stock options granted (dollars in thousands, except per share data):

Note:

(a)    determined under fair value based method for all awards, net of tax ($559 and $797 for the three months ended September 30, 2005 and 2004, respectively, and $1,197 and $1,865 for the nine months ended September 30, 2005 and 2004, respectively)

(4) Acquisitions

On February 1, 2005 we acquired Morgan Stanley Capital International Inc. (“MSCI”) and BARRA Inc.’s (“Barra”) 50% ownership interest in the POSIT Joint Venture (the “POSIT transaction”) for $90.0 million plus a contingent component payable over 10 years (equal to 1.25% of the revenues from the business of the POSIT Joint Venture). As a result of the POSIT transaction we became the owner of all right, title and interest, including all proprietary software of the POSIT Joint Venture. The initial $90.0 million purchase price was allocated among goodwill ($79.5 million), and intangible assets ($10.5 million) consisting of the POSIT trade name and proprietary software. Through September 30, 2005, the contingent component of the purchase price approximated $1.1 million, which was recorded as additional goodwill.

Prior to the closing of the POSIT transaction, pursuant to license agreements with the POSIT Joint Venture, we paid quarterly royalties to the POSIT Joint Venture equal to specified percentages of the transaction fees we charge on each share crossed through POSIT. Through January 31, 2005, we incurred royalties to the POSIT Joint Venture of $1.1 million, compared with royalties of $10.3 million incurred during the nine months ended September 30, 2004.

On February 28, 2005, we acquired E-Crossnet Limited (“E-crossnet”) to offer professional investors in Europe an integrated European equities crossing system with access to an expanded liquidity pool.

(5) Goodwill and Other Intangibles, net

The following is a summary of goodwill and other intangibles (dollars in thousands):

9

We recorded additional goodwill in 2005 related to the POSIT transaction, the acquisition of E-Crossnet and additional contingent purchase price consideration related to our March 29, 2004 acquisition of Radical Corporation.

We recorded intangible assets of $10.5 million consisting of proprietary software and the POSIT trade name as part of the POSIT transaction.

During the nine months ended September 30, 2005, no goodwill was deemed impaired and accordingly, no write-off was required.

We amortize other intangibles over their respective estimated useful lives, which range from two to five years.

(6) Securities Owned and Sold, Not Yet Purchased

The following is a summary of securities owned and sold, not yet purchased (dollars in thousands):

(7) Receivables From and Payables To Brokers, Dealers and Other

The following is a summary of receivables from and payables to brokers, dealers and other (dollars in thousands):

(8) Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consisted of the following (dollars in thousands):

10

(9) Earnings Per Share

The following is a reconciliation of the basic and diluted earnings per share computations (amounts in thousands, except per share amounts):

The following is a summary of anti-dilutive options not included in the detailed earnings per share computation (amounts in thousands):

(10) Net Capital Requirement

ITG Inc., AlterNet and ITG Execution Services are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, which requires the maintenance of minimum net capital. ITG Inc. has elected to use the alternative method permitted by Rule 15c3-1, which requires the maintenance of minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions. AlterNet and ITG Execution Services have elected to use the basic method permitted by Rule 15c3-1, which requires that they maintain minimum net capital equal to the greater of $100,000 for AlterNet and $5,000 for ITG Execution Services, or 6 2/3% of aggregate indebtedness.

At September 30, 2005, ITG Inc., AlterNet and ITG Execution Services had net capital of $38.8 million, $3.0 million and $1.0 million, respectively, of which $38.6 million, $2.9 million and $1.0 million, respectively, was in excess of required net capital.

In addition, our Canadian, Australian, Asian (Hong Kong and Japan) and European operations had regulatory capital in excess of the minimum requirements applicable to each business as of September 30, 2005 of approximately $10.8 million, $3.4 million, $8.9 million, and $13.7 million, respectively.

As of September 30, 2005, ITG Inc. held a $5.1 million cash balance in a segregated bank account for the benefit of customers under certain directed brokerage arrangements.

11

(11) Segment Reporting

We have two reportable segments: U.S. Operations and International Operations. The U.S. Operations segment provides equity trading and research services in U.S. securities to institutional investors, brokers and alternative investment funds and money managers. The International Operations segment includes our brokerage businesses in Australia, Canada, Europe, and Asia, as well as a research and development facility in Israel.

The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies described in Note 2, Summary of Significant Accounting Policies, in our annual report on Form 10-K for the year ended December 31, 2004. Intersegment transactions that occur are based on specific criteria or approximate market prices. We allocate resources to and evaluate performance of our reportable segments based on income before income tax expense.

A summary of the segment financial information is as follows (dollars in thousands):

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Executive Overview

We have two reportable segments: U.S. Operations and International Operations. The U.S. Operations segment provides equity trading and research services in U.S. securities to institutional investors, brokers and alternative investment funds and money managers, while our International Operations segment includes our brokerage businesses in Europe, Australia, Canada and Asia (Hong Kong and our start-up business in Japan), as well as a research and development facility in Israel.

Revenues primarily consist of commissions generated by customers’ use of our trade execution and analytical and research services (“commission revenues”). Because these commissions are paid on a per-transaction basis, commission revenues fluctuate from period to period depending on (i) the volume of securities traded through our services in the U.S. and Canada, and (ii) the contract value of securities traded in Europe, Australia and Asia.

Expenses consist of compensation and employee benefits, transaction processing, software royalties, occupancy and equipment, telecommunications and data processing services, and other general and administrative expenses.

While there continues to be pricing pressure in the U.S. equity markets reflecting continued competition from electronic execution providers and from traditional broker-dealers, the market environment for our U.S. Operations improved during the three months ended September 30, 2005 (“Third Quarter 2005”), compared with the three months ended September 30, 2004 (“Third

12

Quarter 2004”), resulting in our second consecutive quarter of consolidated revenues in excess of $100 million and operating margins in excess of 25%.  In this environment, ITG’s U.S. daily trading volumes and U.S. commission revenues per day achieved strong growth in Third Quarter 2005 versus Third Quarter 2004, as well as in the nine months ending September 30, 2005 (“First Nine Months 2005”), versus the nine months ending September 30, 2004 (“First Nine Months 2004”), as set forth in the table below:

ITG’s U.S. revenue growth for Third Quarter 2005 benefited from strong growth across our product spectrum.  The 33% increase in ITG’s U.S. daily trading volumes reflects strong volume growth in the POSIT suite of crossing products, algorithmic trading products, Triton and Radical.  Our average U.S. daily volume growth outperformed increases in daily volumes at the NYSE and Nasdaq of 16% and 5%, respectively, over the same period.  Sequentially, daily trading volumes decreased 2% at NYSE and declined 7% at Nasdaq in Third Quarter 2005 versus the second quarter of 2005, while ITG’s U.S. daily volumes increased 4.4% over the same period.

Total International revenues for Third Quarter 2005 increased $4.2 million or 23% versus Third Quarter 2004 to $22.4 million reflecting strong volume growth in Canada (contributing $2.5 million to overall international commission revenue growth), as well as the $0.7 million (or 4%) benefit of exchange rate fluctuation (as a result of a weakened U.S. Dollar relative to the currencies in our International Operations).  Similarly, total revenues for First Nine Months 2005 from our International Operations also grew 23%, versus First Nine Months 2004, to $67.5 million and include a $2.8 million (or 5%) benefit from exchange rate fluctuations.

The International Operations as a whole posted a pre-tax profit of $0.8 million, which included a foreign currency benefit of $0.1 million versus Third Quarter 2004. Canada posted pre-tax profitability of $1.5 million in Third Quarter 2005 and the combined Australia/Asia region had a pre-tax loss of $0.4 million, which includes $0.5 million in costs pertaining to our expansion into Japan. Europe posted a pre-tax loss of $0.3 million following a decline in volumes due primarily to security concerns throughout London in July as well as typical seasonality in August.

During Third Quarter 2005, we entered into an agreement to acquire The Macgregor Group, Inc. (“Macgregor”), a leading provider of trade order management technology, for approximately $230 million. The combined technologies of ITG and Macgregor will enable us to provide clients with a best-execution order management system that will closely integrate real-time data, analytics, order management and execution tools into a complete solution for institutional trading desks. The transaction is expected to close in early 2006.

During Third Quarter 2005 we also entered into an agreement to acquire Plexus Group Inc. (“Plexus”) for approximately $12 million. Plexus is a leading provider of transaction cost analysis services. The combination of ITG and Plexus will allow our clients to benefit from a more comprehensive transaction cost analysis product offering. The acquisition also expands ITG’s client base into the plan sponsor and sell-side customer segments in the U.S. and Europe. The transaction is expected to close in January 2006.

We are in the process of establishing credit facilities, which are likely to consist of a $200 million term loan and a $25 million revolving credit facility to partially finance our pending acquisitions of Macgregor and Plexus as well as supplement our existing regulatory capital and other working capital requirements, as needed.

Results of Operations—Three Months Ended September 30, 2005 Compared to Three Months Ended September 30, 2004

Highlights

The table below sets forth certain items in the condensed consolidated statements of income expressed as a percentage of total revenues for the periods indicated:

13

Earnings Per Share:

Both basic and diluted earnings per share for Third Quarter 2005 increased $0.12, or 48%, to $0.37 from $0.25 for Third Quarter 2004.

Revenues:

Consolidated Revenue

Consolidated revenues increased 18%, to $102.2 million in Third Quarter 2005. There were 64 trading days in Third Quarter 2005 compared with 67 trading days in Third Quarter 2004.

Our commission revenues benefited from strong share volume/contract value growth within our U.S. and International Operations. Share volumes grew 26% in our U.S. Operations and 61% in Canada. In Europe the market value of executions grew by 15%, more than offsetting lower revenue per contract value, while Australia and Hong Kong collectively achieved a combined growth rate of 46% in the market value of executions.

Other revenues decreased $1.3 million to $5.4 million in Third Quarter 2005 resulting primarily from a decrease in investment income from Third Quarter 2004, when we recorded a $2.1 million gain on our ownership in Archipelago Holdings common stock, which we received as part of an equity entitlement program, partially offset by increases in our Canadian inter-listed arbitrage trading.

The following table sets forth the components of revenues, by segment, included in the condensed consolidated statements of income (dollars in thousands):

Revenues by segment—U.S. Operations

Revenues from U.S. Operations of $79.8 million increased 17% compared to Third Quarter 2004.

14

Commissions

Commission revenue growth in Third Quarter 2005 was driven by strong average daily volume growth from our POSIT suite of crossing products, algorithmic trading products, Triton and Radical, despite three fewer trading days in Third Quarter 2005 and a 4% reduction in revenue capture per share. The following table includes key operating performance metrics:

Other

Other revenues decreased $2.0 million in Third Quarter 2005 primarily due to the recognition of a $2.1 million gain on our ownership in Archipelago Holdings common stock in Third Quarter 2004.

Revenues by segment—International Operations

Commissions

Commission revenues from International Operations increased $3.5 million, or 22%, and include a $0.5 million benefit from exchange rate fluctuations reflecting a weakened U.S. Dollar relative to the currencies in our International Operations. Excluding the foreign currency impact, commission revenues grew $3.0 million or 19%.

Our European commission revenues grew 2% to $8.4 million.  The market value of executions increased 15% while the average price per contract value declined 13% as we experienced a business mix shift which yielded increased revenues in our lower priced non-POSIT related execution services. Revenue growth and reduced POSIT executions were both influenced by the security concerns throughout London in July, as well as the addition of further stocks to the London Stock Exchange’s SETSmm trading service in July.

In Canada, we benefited from significantly higher volumes (61%), fueled by a 27% increase in Toronto Stock Exchange (“TSX”) volumes, significantly improved client site trading revenues (resulting from our Triton product, which became available in late 2004) and higher algorithmic trading revenues (resulting from our Horizon SmartServer, which became available earlier in 2005).  Canadian commission revenue growth also included a $0.5 million benefit from foreign exchange rate fluctuations during Third Quarter 2005.

The following table sets forth the components of our international commission revenue growth: