SEC Steps Up Knight Trading Probe

The complaint alleges that Stellato found evidence of front-running on at least three occasions in August 2000. It accuses Knight management's "engaged in a cover-up to ensure" that no one found out about the alleged front-running.

Knight's general counsel, John Bluher, said the firm did nothing wrong and has no intention of settling the arbitration case. He said dispute with the former Knight employee is set for an arbitration hearing early next year.

The news that SEC is stepping up its investigation, however, did little damage to Knight's shares. In mid-afternoon trading, the stock was down just 9 cents to $4.69.

Some of the muted reaction is no doubt due to the fact that most of the allegations have been known on the Street for some time. But Knight also is a beaten down company and much of the air was long ago taken out of its sails.

Back in the heyday of the bull market, Knight was one of Wall Street's high-flyers. Trading revenues rolled into the Jersey City, N.J., firm from the explosive popularity of Nasdaq stocks. Knight is the biggest market-maker on the Nasdaq Stock Market.

But the collapse of the Nasdaq has taken a big bite out of Knight's profits. In the most recent quarter, the firm posted a $3.4 million loss.

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