Knight/Trimark Finds Out Who Its Real Friends Are

The market maker remains haunted by some big filings from insiders wanting to sell, and a big overhang of shares still could come to market.
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Sometimes you like to see a large portion of a company's stock in the hands of a small group of loyalists. After all, one would expect these "insiders" to be less likely to bail at the first sign of trouble. But what happens if the stock flounders and, even worse, if the group holding all those shares suddenly proves less loyal than you'd hoped?

The holders of



may soon find out. While the shares trade a full 50% below their May 10 peak of nearly 80, members of a consortium of 22 mostly online brokers have recently filed intentions to sell substantial portions of their Knight/Trimark holdings. Also, because incentives to hold onto their remaining stakes appear to be fading, these brokerages with remaining stakes of more than 20 million shares will continue to haunt the stock as a potential source of supply.

How did we get to this point? The shares in question were originally acquired by the brokerages in advance of Knight/Trimark's 1998 IPO, largely in exchange for routing trades through Knight's system. That gave the group 42% of the company's outstanding shares just before the IPO. In February, many in the group took advantage of a secondary offering to sell more than 4 million shares, trimming the group's collective position to just under 29%. Six brokerages have since filed intentions to sell more shares at ever-lower prices, despite the pummeling suffered by the stock price.

The selling may continue. Knight/Trimark once paid the brokerages annual profit distributions in return for their equity investment -- a practice that it recently discontinued. What's more, many online brokerages are building equity stakes in electronic communication networks that could potentially divert order flow, and thus revenue, away from market makers like Knight/Trimark, whose revenue depends largely on the order flow generated by these online brokerages.

Surely, with their increased interest in ECNs, online brokerages might increasingly come to regard their Knight/Trimark shares as nonstrategic holdings, thus introducing a glut of shares to the marketplace. The fact that the brokerages have a cost basis of only $5 per share (split-adjusted) is not very encouraging.

Waterhouse Investor Services

recently filed an intention to sell 8 million Knight/Trimark shares.



filed to sell 1,494,400 shares. For Waterhouse, this was in addition to the 850,000 shares already sold in July and August and would represent a 96% reduction in its common holdings. E*Trade's intended sale results in a 48% reduction. In all, from July 19 through Oct. 29, Waterhouse, E*Trade and four other firms filed intentions to sell a combined 11,297,214 shares.

Nor does it help that company executives are joining in the parade. Back in July and August, five insiders unloaded a combined 1.8 million shares at $31 to $47.50 per share, and at least one insider has been even more resourceful. In August, Knight Securities' Chief Operating Officer Walter Raquet entered into a pair of zero-cost collar arrangements by which he effectively hedged 2 million shares of his position against downside risk. The two important points here are that: 1.) the collars were put in place with the stock trading well off its highs; and 2.) the options involved were European-style, and as such exercisable only upon expiration in 2002 and 2003. What this says to us is that not only has Raquet positioned himself for possible share price weakness, but because the options are exercisable only on expiration, his concerns aren't what you might call short term in nature.

Finally, other transactions by Knight/Trimark insiders have an equally exotic flavor.

NMS Services (Cayman) Inc.

recently filed a Form 144 registration to sell 244,862 shares. The sale could be dismissed as routine profit-taking, but where exactly did NMS -- which was not part of the original group -- get these shares in the first place? It turns out that 144,882 of these shares were purchased on May 27 from

Van Kasper & Co.

, one of the original participating online brokers. The remainder were acquired from another shareholder, William Lewke, between April 23 and June 4.

Listed as sellers in Knight/Trimark's early March secondary, both William Lewke and Van Kasper & Co. were subject to the 90-day lockup, prohibiting them from selling before June 1. In addition, Rule 144 prevented them from selling in the open market until July 13. Their sales to NMS Services (Cayman), occurring between late April and early June, were clearly in advance of both expirations. Technically, because these were private transactions and the buyer, NMS, did not sell the underlying shares until after all lockups had expired, the sales did not violate either restriction, but the sales clearly circumvent the


of the lockup agreements.

Meanwhile, Knight/Trimark, up 52% over the past two weeks, has shown clear signs of moving off a bottom. The developing insider profile is nonetheless troubling. The recent flood of highflying IPOs has fueled an increased interest in lockup expirations and the threat of overhang they pose. Of course, the reality of such threats depends largely on the likelihood that the shares will hit the market upon the lockup expiration. Regarding the 20 million pent-up Knight/Trimark shares, it appears that the unwinding has already begun.

Bob Gabele has been tracking and analyzing insider trading since 1978, most recently for First Call/Thomson Financial. This column is not meant as investment advice; it is instead meant to provide insight into the methods of insider trading. At time of publication, Gabele held no position in any of the companies discussed in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabele appreciates your feedback at

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