Knight Trading Denies FBI Raid, but Shares Plunge Anyway

Knight Trading fell sharply Friday, first on rumors its offices had been raided by the FBI, which the company denied, and later on a CIBC World Markets downgrade of its shares.

A spokeswoman said: "The FBI rumors are false, there is no criminal investigation going on by FBI or SEC." Nevertheless, Knight's shares closed off 13.9% to $6.85.

Investors have been more apt to react to any rumor of an investigation after the Enron meltdown, but some say investors have good reason to worry about Knight, and not necessarily because of any police actions.

As the biggest market maker in Nasdaq securities, Knight has been hard hit by decimalization. The change, implemented last year, has reduced trading spreads from what they used to be. Now stocks can trade in penny increments, as opposed to the old increments of 1/16 of $1.

That's tough on Knight, which makes its money by buying and selling shares for investors and small dealer firms and pocketing the difference between the bid and ask price.

Knight's earnings, like those of many firms involved with swapping securities, have plunged since the rule took effect early last year. In the fourth quarter, the company's profit fell to $13.5 million, or 11 cents a share, from $35.3 million, or 28 cents a share, a year earlier. Citing the weak market environment and lower margins at Knight, CIBC cut its earnings estimates to 47 cents a share from 90 cents a share for 2002 and to 85 cents from $1.10 for 2003. The firm also downgraded Knight's stock to hold from buy.

As profits dropped, the company has gone through a series of executive changes. The company's CEO Kenneth Pasternak made plans to step down last December. Last June, John G. Hewitt, president of the trading arm and David Sphilberg, Knight's chief operating officer, left as the company set plans to cut about 3% of its US workforce. Sphilberg told journalists he left because of disagreements with other executives over how to turn around the company.