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LaBranche Taken to the Woodshed

Specialist trading firm LaBranche (LAB) saw nearly one-quarter of its market value vanish Friday in the wake of its grim bottom-line forecast.

The company warned late Thursday that it would post a $23 million loss for the second quarter due to a decline in its market-making business on the New York Stock Exchange. LaBranche said that adverse market conditions over the past two months dragged down profits.

At the 4 p.m. EDT close of trading, its shares had lost $3.02, or 24.3%, to $9.42.

Labranche's demise dragged down the other publicly traded specialist firm, Van der Moolen Holdings (VDM) 7.4% to $6.84.

Labranche's warning doesn't bode well for retail trading with the online brokers. On Friday, E*Trade (ET - Get Report) was down 68 cents, or 3% to $22.26, and TD Ameritrade (AMTD) was down 53 cents, or 3.6%, to $14.42.

For the second quarter, Labranche said it returned to its losing ways. The company said its estimated $23 million loss includes a $5 million operating loss, or 8 cents a share. It also includes a noncash $17 million decline in the value of the firm's restricted shares in the NYSE Group (NYX), the parent company of the New York Stock Exchange.

LaBranche, one of the largest and oldest specialist trading firms on the NYSE, said that during the quarter, principal trading revenue totaled about $20 million, down $47 million from the second quarter of 2005.

Specialist firms, which earn commissions for matching buyers and sellers on an exchange, also make money from trades made to smooth out fluctuations in stock prices. The firms are permitted to make proprietary trades for their accounts, but not at the expense of any customer.

The firm's earnings warning marks a return to the kind of lackluster performances LaBranche posted during much of the past two years. LaBranche broke that negative trend when it reported sharply higher profits in the fourth quarter of 2005 and the first quarter of this year.

Ironically, most of LaBranche's first-quarter jump in profits stemmed from the sale of NYSE seats as part of the Big Board's merger with Archipelago.

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