Shares of

Nasdaq

market maker

Knight Trading Group

(NITE)

tanked even though the company reported its best fourth-quarter earnings in three years.

On a GAAP basis, the company earned $10 million, or 8 cents a share, including an asset impairment charge, which compares to a loss of $3.6 million, or 3 cents a share, in the prior-year quarter.

The Jersey City, N.J.-based company had operating earnings of $28 million, or 23 cents a share, compared to $2.2 million, or 2 cents a share, in the fourth quarter last year. On that basis, analysts were calling for earnings of 20 cents a share.

Revenue was $201.8 million, the company's highest since 2001, compared to the prior year's $141.6 million. Increased share volume and strength in its asset management business drove results.

Shares were off $2.46, or 14.5%, to $14.50 in late trading.

"Knight's performance continues to be quite strong, with the success in gaining business from institutional clients particularly impressive," said Raymond James analyst Michael Vinciquerra. (Raymond James has an investment banking relationship with Knight.)

Knight's asset management segment had $20.9 million in fees during the quarter, up from $14.5 million in the same period a year ago. Its equity markets unit had trading revenue and interest of $111.8 million, up from $72.4 million a year ago.

The company said that average daily U.S. equity trade volume in December was 813,000, a decrease of 1.1% in November, but up almost 41% from December 2002. Additionally, average daily U.S. equity share volume was 3.3 billion in December, up 53% from 2.16 billion in November, and up 235.4% from December 2002.

Knight said that while "equity dollar volume traded was up in the fourth quarter," its "overall equity market results were flat compared to the previous quarter as less robust trading opportunities and decreased market volatility led to lower revenue capture per share, offsetting that increased dollar volume."

Analyst Charlotte Chamberlain of Jefferies & Co. believes investors are focusing too much on that statement.

Investors don't understand the "relative contribution of Bulletin Board trading to overall revenue and earnings," said Chamberlain, noting that Knight is viewed as a Bulletin Board play with 50% to 60% market share.

"People were aghast that revenue capture declined," she said. "However, total Bulletin Board revenue climbed 13% in the quarter to roughly $34 million from $30 million in the third quarter."

"The market is wrongheaded about this," the analyst said, further citing the

recent results from both

Ameritrade

(AMTD) - Get Report

and

E*Trade

(ET) - Get Report

that January volumes are up.

"Knight has proved that they have a much more resilient source of earnings than we've seen at any other time," said Chamberlain.