Stock trader Knight Trading Group Inc. Wednesday said it settled investigations with U.S. regulators and forecast earnings below Wall Street estimates, citing low trading volume and volatility.
Knight said it had reached an agreement in principle with the Securities and Exchange Commission and the NASD and would take a charge of $79 million in the second quarter related to the matter. The probe related to institutional trading activities from 1999 to 2001.
In addition, saying both trading volumes and market volatility have been very low, Jersey City, New Jersey-based Knight forecast second-quarter earnings of between 6 cents and 11 cents a share, excluding charges and writedowns.
Wall Street analysts, on average, had expected the firm to earn 17 cents a share, according to Reuters Estimates.
Trading activity and volatility have been restrained across U.S. stock markets for months, as investors have sat on the sidelines amid uncertainty about interest rates, the handover of power in Iraq, high oil prices and, more recently, questions about the strength of the economy.
Volume on Nasdaq, where Knight is a leading trader and market maker, peaked in January and has fallen precipitously since. Knight’s own stock price has slid right along with the drop in volume.
Under the terms of the agreement with regulators Knight will give back about $41 million in institutional trading profits, and pay $13 million in interest and $25 million in penalties.
The SEC and NASD will determine how the funds are to be distributed.
In 2002, Knight had said the SEC was conducting a formal investigation into allegations by a former employee that it was involved in improper trading. In an arbitration claim, the employee contended Knight traders placed their own orders for stock before carrying out customer orders, a practice known as ”front running.”
In March, Knight said it received a so-called Wells Notice relating to its equity unit and former Chief Executive Kenneth Pasternak, who stepped down in January 2002, pertain to trading activity, conduct, supervision and record-keeping from 1999 through 2001.
A Wells Notice informs a company that regulators are likely to bring a civil action against it.
Three other former Knight employees have been notified by regulators of possible civil actions against them as well. The agreement in principle does not address the Wells Notices received by past employees.
Knight consistently denied the allegations and said outside legal and market experts it hired to review the situation found no evidence of front running.
The agreement is subject to the drafting of settlement papers and final approval by the SEC and NASD.
Knight shares closed Tuesday at $9.23 on Nasdaq. Since hitting a two-and-a-half-year high above $17 in late January, about the time Nasdaq volume peaked this year, the stock has fallen more than 45 percent, lagging the Nasdaq composite index, which is down about 8.4 percent over the same time.
