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Knight Trading's Shares Sink on SEC, NASD Probe

Investigation: Firm is accused of placing its orders for stocks before orders placed by clients during tech boom.

June 05, 2002|From Times Wire Services

The biggest trader of Nasdaq stocks is the latest firm to trigger mistrust on Wall Street.

Knight Trading Group Inc. acknowledged Tuesday that a former employee has accused it of improper trading practices during the 1990s tech boom, prompting investigations by the Securities and Exchange Commission and the National Assn. of Securities Dealers. The company denies any wrongdoing.

"The allegations are completely unfounded. The very private arbitration case was made public by an unhappy ex-employee. We are comfortable that we have not done anything wrong.... We will be totally vindicated," Chief Executive Thomas M. Joyce said.

The SEC declined to comment, and the NASD couldn't be reached for comment.

Knight's stock took a beating Tuesday. The shares fell $1.28, or 22%, to $4.64 in Nasdaq trading after falling as low as $3.75 early in the day.

The probe is a result of a sealed arbitration complaint filed late last year by Robert Stellato, the former head of Knight Trading's institutional trading desk, Joyce said.

Jersey City, N.J.-based Knight Trading, the biggest trader of stocks listed on the Nasdaq Stock Market, is accused of placing its own orders for stocks before orders placed by clients. The practice--known as front-running--would have allowed Knight Trading to profit from the increase in stock price caused by its client's subsequent order.

According to the complaint by Stellato, as reported in the Wall Street Journal, Stellato was warned of missteps at the firm soon after joining Knight in 2000.

According to the complaint: "These warnings prompted Stellato to interview the rest of the institutional sales traders, who each told him that [company executives] were, at the least, front-running customer orders."

In January, Knight was fined more than $1.5 million for a series of violations, the largest penalty imposed by the NASD for the violations involved. The fine coincided with the departure of Kenneth Pasternak, who helped found Knight in 1995.

Knight reported a loss for the first quarter as revenue slid to $133.5 million, down 74% from the same quarter two years earlier at the height of the bull market.

Tuesday marked the second day of bad news for Knight. On Monday, the firm said a software glitch caused its computers to dump more that 1 million shares of its own stock--causing the price to plummet by 50% in pre-market trading. The Nasdaq market later canceled the trades at Knight's request, and the stock ended the day down only 7%.

Knight carried out an average of 480,000 stock trades a day in the first quarter, down 31% from 700,000 two years earlier. Joyce said that the latest two days of turmoil have not reduced trading volumes noticeably.

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