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January 1, 2001

At Deadline

By John A. Byrne

Earnings

*Knight Trading Group will report lower than expected fourth quarter earnings thanks to a down market and nervous online traders, according to Chase H&Q analyst Greg Smith. Smith lopped eight cents off an earlier projection of 33 cents per share, leaving Knight with only 25 cents for the quarter. His analysis comes despite a recent cutback by Knight in the amount of price improvement it offers.

At the start of the quarter, Knight reduced its price improvement minimum on eligible pre-opening orders from 6.25 cents (1/16th) per share to 1.5 cents (1/64th) per share. "We underpriced," conceded Michael Dorsey, chief legal counsel at Knight. "We made it too generous."

Smith, however, said he did not factor in the change. "Given Knight's heavy exposure to retail trading volumes, we believe the quarter will prove tougher than we originally anticipated," he wrote in a research note.

Bonus Season

*Bonus time on the Street is turning out to be a rerun of 1999's generous feast. This past year set an all time record for profits on the Street. As a result, many institutional stock traders are expected to be rewarded with sizeable bonus checks. The Securities Industry Association estimates that Wall Street firms earned about $22 billion in profits last year, compared to $16.27 billion in 1999. The trade association also said that about $12.1 billion in bonuses were paid out in 1999 to traders, investment bankers and other Wall Street pros.

Nonetheless, there are differing views on the size of bonus checks. The New York State comptroller's office expects bonuses to grow by about 10 percent. The SIA's chief economist, Frank Fernandez, disagrees. "I don't see it," he said. "Even though it's been a record year, we have had sequential declines in profitability for the firms." Fernandez forecasts that bonuses will be either the same as last year or only "fractionally higher."

Meanwhile, there are rumblings among some traders that the sluggish market and the rash of mergers and acquisitions may result in further layoffs and shrinking bonuses. "Why compensate someone if you are going to lay them off," said the SIA's Fernandez.

Nasdaq Program

*The Philadelphia Stock Exchange plans to take another stab at trading Nasdaq stocks sometime early this year. It has petitioned the Securities and Exchange Commission for permission to restart a program that it abandoned after three years in 1996. That's when some key executives quit the exchange. An exchange official says the prospect of using specially-built market making technology from New York's TradinGear provided the impetus for the proposed six-month pilot.

The Philadelphia plans to start with 20 to 50 stocks, trading under the "PHLX" market maker ID. With the announcement it becomes the second regional exchange in the past 12 months to propose Nasdaq trading. The Cincinnati Stock Exchange announced a plan in December 1999. The Chicago Stock Exchange has run a very successful Nasdaq trading operation for a number of years. All five regional exchanges are allowed to trade Nasdaq stocks under the unlisted trading privileges granted by the Securities Act of 1934.

Levitt Resigns

*Trading industry players wonder, with the pending resignation of SEC Chairman Arthur Levitt, if his successor will also be an activist chairman. Levitt, appointed by President Clinton in 1993, oversaw sweeping changes in the dealer market. The order handling rules, for instance, were ushered in under his leadership. Levitt waged a campaign for more inter-market linkages and called for deeper transparency of stock-quote data. He recently questioned whether the commissions charged on institutional orders should be reduced.

Most interestingly, will Nasdaq's SuperMontage be a priority for his successor? An official at Nasdaq, who declined to be named, said Nasdaq was confident the SuperMontage would be rolled out without undue delay. A spokesman for the SEC chairman could not be reached for comment. An SEC study, reportedly critical of Nasdaq trading costs, could be delayed or abandoned with the change in SEC leadership, observers say. "We have not seen the study and it is premature anyway to comment on it," a spokesman for Nasdaq said. Levitt said he will step down in February.