Citing "persistent lackluster market conditions," trading execution specialist Knight Trading Group (NASDAQ:NITE) stated that it expects to lose money in its third quarter of 2004, lowering its guidance to a loss from a penny to 4 cents per share. Knight's warning puts the harsh light on other companies that are dependent on stock and other asset-trading volumes and volatility for their business, including Schwab (NYSE:SCH), Ameritrade (NASDAQ:AMTD), and LaBranche (NYSE:LAB).
Trading volumes for the third quarter of the year on Nasdaq, for example, declined about 9% from the previous quarter, which in itself wasn't anything to write home about. In addition to the poor operating environment, Knight's results are also likely to be impacted by an increase of expenses related to its ramping up of sales activities in the U.K., as well as poor performance at its Deephaven asset management division. Deephaven has a risk-arbitrage strategy that focuses on buying and shorting stocks in pairs for companies that are likely takeover targets. If merger and acquisition activity dries up, Deephaven's universe of investments shrinks.
The triple whammy on Knight could be severe, with revenues that may be as much as 30% below where they were last year. It's noteworthy, though, that Knight Trading's stock hasn't fallen that much. One explanation could be that even though such a trough in business isn't a positive for Knight, such an outcome is a logical outcome of a lull in the trading cycle and shows no real correlation with a weakening of Knight's business or competitive position. Knight does have the advantage of no longer having to worry about the SEC probes that dogged it for several years. In July the company paid $79 million to settle with regulators over lapses in its trading, supervision, and record-keeping activities from 1999 through 2001. Several former employees, including former CEO Ken Pasternak, face potential civil charges resulting for their roles in trading violations at the company. Of course, once Knight settled, that became their problem, not the company's.
It's a big deal in that the company isn't exactly socking away the cash over the short term. It would be a much bigger deal if Knight were losing ground to its competitors, something that isn't evident at the moment.
Bill Mann liked the name Knight-Trimark better. He does not own shares of any company mentioned in this article. Schwab was a recommendation of the Motley Fool Stock Advisor .
