Updated from 11:38 p.m. EDT

Shares of

Knight Trading Group

(NITE)

fell after the company said that its third-quarter earnings would fall short of Wall Street's expectations.

Knight Trading Group finished Wednesday regular trading down $3.69, or 11%, at $28.50.

The Jersey City, N.J.-based market maker said the

Nasdaq's

downward arc in recent months drew caution from individual investors, resulting in low market volatility and unseasonably slow trading.

Knight said it now expects earnings of 13 cents to 16 cents a share for the third quarter, including an expenditure of 7 cents a share for international expansion. Wall Street analysts polled by

First Call/Thomson Financial

had expected earnings of 31 cents a share, compared to 19 cents a share in the year-ago quarter.

Despite the First Call predictions, the company said that its own previous expectations had been only 22 cents to 27 cents a share. In a statement Wednesday, Knight sought to remind investors that in a conference call after its previous earnings announcement, executives predicted 20% to 30% growth over the year-ago quarter.

Knight blamed "significant downward bias in equity markets, primarily in the Nasdaq, resulting in self-directed individual investors moving to the sidelines."

It said the Nasdaq fell 5.02% in July, gained 11.66% in August and fell 12.68% in September. But it also said trading rotated away from

Russell 2000

stocks to concentrated trading in the

TheStreet Recommends

Nasdaq 100

.

"This trading environment, exacerbated by the seasonally slow third quarter, hurt our profit performance," said Kenneth D. Pasternak, the company's chief executive and president.

The lower volumes and the Nasdaq's woes have been self evident, causing analysts to lower revenue expectations for online brokers like

Charles Schwab

( SCH),

E*Trade

( EGRP) and

Ameritrade

(AMTD) - Get Report

. Last week,

National Discount Broker

( NDB) posted a net

loss from continuing operations of $1.3 million, or 6 cents per diluted share, for the first quarter ended Aug. 31.

But volatility's impact is more difficult to gauge, said Richard Zandi, analyst for

Donaldson Lufkin and Jenrette

. To make markets, the firm itself must buy or sell short selected stocks.

"To predict more revenue, by definition, you have to make bets on what the market's going to do," Zandi said. "Everyone knew the markets were going to come down. It was just a question of when." He rates the company's shares a buy, and his firm has not done recent underwriting for Knight.