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June 20, 2005

A New Vision at Knight

By Peter Chapman

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Knight Trading is no more. At its annual shareholders' meeting in Jersey City last month, Knight Trading Group dropped the "trading" from its name and became Knight Capital Group. The move reflects the decline of Knight's traditional market making business and the rise of its institutional brokerage and hedge fund businesses, as Knight looks to transform itself into a new firm. "There's been too much focus on the market making side of the business," says Tom Joyce, Knight's chief executive. "We are more than that. We've developed a fairly robust institutional business and our hedge fund has seen solid growth."

Knight is still the largest dealer of Nasdaq, listed and over-the-counter securities, but the business of wholesaling is past its prime. Government regulations and automated competitors have decimated the revenue picture. By contrast, Knight's institutional brokerage operation is steadily growing. It has nearly tripled its staff of sales traders and is winning plaudits from the buyside for covering more stocks than anyone else.

Still, the picture at Knight bears no resemblance to the fat times of its early years. Knight is still struggling to deliver consistent profits and has had problems on the broker-dealer side.

Knight's heyday was at the height of the Internet boom in the late 90s. That's when the minimum spread was 6.25 cents. In 2000, the firm's net trading revenues, derived primarily from its broker-dealer customers, peaked at $1.0 billion. But that was a much different marketplace. Last year, broker-dealer revenues came in at $251 million. That's down from $276 million in 2003. In the first quarter of this year, they plunged 63 percent to $37 million from $100 million in the same quarter last year.

Faster and Faster

Knight's share volume statistics tell a similar story of decline. During the 12 months ended April 2005, the average daily volume of Nasdaq shares traded was 249 million, down 41 percent from the previous 12-month period. On the listed side, the decline was also 41 percent, to 188 million shares.

At Knight's first quarter analysts meeting in April, Joyce attributed Knight's lower trading results partly to the market's need for speed. "The speed of execution gets faster and faster and faster," Joyce told analysts. "Conditions that have never been seen in the industry. It is much more of a challenge to realize revenue capture."

Speed is indeed the name of the game, says a trading executive. "If the order is extremely quick," says Jeff Martin, president of Automated Trading Desk Financial Services, "meaning two seconds maximum, then it has to be a good execution."

Knight's poor first quarter, Joyce told analysts, was due entirely to the deterioration of the broker-dealer business. The institutional business saw only a slight decline in commissions from the year-ago quarter.


The tough times on the broker-dealer side show up in the metrics watched by Knight management and Wall Street analysts. The key revenue-capture-per-share figure, for instance, hit its lowest level ever during Knight's first quarter.

'There's been too much focus on the market making.'

Thomas Joyce, Knight Chief Executive