Knight Trading Group Caught in Middle of Nasdaq Slump

Trading in Nasdaq stocks just isn’t what it used to be, and that’s taking a toll on the Nasdaq market’s biggest middleman.

Knight Trading Group Inc. said Wednesday that third-quarter earnings will be far below expectations in part because of slower trading volumes.

Knight is the largest Nasdaq market maker: It acts as a middleman in many trades, selling to investors who want to buy and buying from investors who want to sell.

Nasdaq trading peaked in the first quarter of this year with the surge in technology stocks. Trading in the third quarter averaged 1.58 billion shares a day, Nasdaq said Wednesday. That figure was flat with the second quarter.

Knight said it expects to earn between 13 and 16 cents a share in the third quarter, far below the 37 cents analysts had expected.

The news sent Knight shares (ticker symbol: NITE) tumbling $3.69 to $28.50 on Nasdaq, though the stock ended well above its morning low of $24.50.

“A number of things came together that should not have been totally unexpected” in the quarter, said WR Hambrecht & Co. analyst Jonathan Fayman.

A major problem for Knight was that trading in Bulletin Board stocks, the smallest companies in the over-the-counter market and a lucrative trading business for Knight, declined as investors shied away from such high-risk plays.

“People are not Bulletin Board trading, which was the source of a great deal of [Knight’s] revenue and profits in the first quarter,” said Bear Stearns & Co. analyst Amy Butte.

Jersey City, N.J.-based Knight also cited increased expenses of about 7 cents a share from its expansion into overseas markets such as Britain.

Still, “nobody expected [the quarter] to be this bad,” Putnam Lovell Securities analyst Cathleen Boucher said. “They probably made money trading overall, but they could have had some big loss days in there.”

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Slower Going

Nasdaq trading volume flattened in the third quarter from the second quarter

and was well below the first-quarter peak.

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Average daily Nasdaq trading volume, in billions of shares

Third quarter: 1.58 billion

Source: Nasdaq