When online trading peaked last quarter, few firms benefited more than


market maker

Knight/Trimark Group


, but the Nasdaq's recent tremors may be shaking the company's lucrative foundation.

The latest Nasdaq trading volume available from


shows that in April, Knight ceded market share in over-the-counter and bulletin board stocks to traditional Wall Street firms for the second consecutive month.

The numbers may show, as Knight's CEO contends, a return to more normal bulletin board trading volumes after extreme increases, or the numbers may be an early sign that individual investors are pulling in their horns as institutional investors take an even greater hold on the market.

In addition, the Nasdaq is considering requiring market makers to pass along to investors any prices the dealers get before the market opens, slicing into any insight firms such as Knight can get from seeing order flow lined up in anticipation of the open.

The majority of Knight's business comes from online brokers such as

TD Waterhouse





. Its ascent to February's 22% market share has largely been attributed to increased trading at the online brokers that are Knight's original investors and largest customers.

By the end of April, however, with the market shaken and individual investors bloodied, Knight's market share was down to 13.8% from 18% in April 1999 and from 15.9% the previous month.

Other Nasdaq market makers such as

Charles Schwab's


Charles Schwab Capital Markets L.P.

(formerly known as Mayer & Schweitzer) and privately held

Herzog Heine Geduld

also saw their volume numbers decline while

Merrill Lynch



Goldman Sachs

(GS) - Get Report

, and


(C) - Get Report

Salomon Smith Barney

unit grabbed more.

The market share fall could be damaging to Knight's stock if it cuts into Knight's ability to produce the sequential quarterly growth in profits that has become its trademark. In the past, Knight/Trimark has attributed its success at proprietary trading in part to the vast knowledge that seeing such a large percentage of orders brings.

"If there is a real deterioration in the market share, that's obviously a negative for the stock," says Paul Stocking, a senior analyst at

American Express Asset Management

, one of Knight's largest institutional shareholders.

It's something to watch, he says, because if the company's shift of resources to the listed business from bulletin board stocks ends up creating more profits than is lost, that would be a sound move. If not, it could mean more trouble.

In recent quarters, Knight has expanded its business to include increased institutional sales, which don't have the same focus on Nasdaq stocks that many retail businesses do, and acquired an options market maker and clearing house. It also has taken stakes in companies overseas like Easdaq, a European exchange.

Declining volume on Nasdaq bulletin board stocks and increased institutional orders explain the market-share erosion, says Knight/Trimark Chief Executive Kenneth Pasternak. "The bulletin boards are certainly the most elastic part of our market mix, so we had tremendous growth with them in the first quarter and fourth quarter," he says.

Bulletin board stocks can be lucrative for both investors trading on their volatility and the market maker, who is setting their prices. According to Nasdaq' OTC bulletin board Web site, average daily trading volume in bulletin board stocks fell to 401 million shares in April from 1.1 billion in March and 1.2 billion in February.

The drop goes further than the Nasdaq bulletin board. The retail investor demand is less, according to Pasternak. There's a "change in mix between the institutional and retail component of the market with institutional being more dominant."

When signs of decreasing market share emerged in March, the company said the decline came because it stopped making markets in certain high-volume bulletin board stocks while it increased the staff on its trading desk to handle volume. Knight has started trading most of those stocks again, according to Pasternak.

Knight also said that Autex had miscalculated some numbers, but those figures have been adjusted with only a slight effect on market share.

Pasternak says the firm continues to budget year-over-year growth of 30% for average daily trades, which were at 700,000 last quarter. And he said that he remains comfortable with analysts' expectations for earnings of 66 cents a share in the second quarter.

During Knight's first-quarter conference call two weeks ago, though, analysts questioned whether Knight's market share was suffering because firms such as Merrill and Goldman were reducing the orders they sent to Knight to regain control over order flow. A March 3 story in

The Wall Street Journal

describing how Knight's ability to see thousands of orders directly contributes to its profits fueled that speculation, as well as Merrill's decision to create a new

Nasdaq market making business in Jersey City.

Pasternak says Knight's not alone in seeing market share slide. Other firms that serve online traders are seeing the same. Schwab's market share fell to 11.3% from about 13% in March and February while Merrill, Goldman and Solly -- which rely less on retail investor trading -- all moved up to about 4% from 3%.

Then there are those who question using AutEx numbers at all, like Rich Sokol, a portfolio manager at

Westcore Funds

, which is long the stock. He's more interested in Knight's revenues, which grew 81% from the fourth quarter to $513 million.

"It's hard to get too excited about (the decline) when you see the revenues," Sokol says.