alas, i just recently discovered this one. anyhoo, thought you might like this piece out of today's red herring. i know, i know, not the most objective rag out there, but i do what i can.
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Knight/Trimark benefits from online stock boom
By Scott Raynovich
Red Herring Online
April 22, 1999
Several months ago, a Nasdaq stock symbol called NITE began lighting up the screens of those following the Internet stock boom, leaving many scratching their heads and wondering who these guys were.
For the first quarter of 1999, ending March 31, Knight/Trimark's earnings more than tripled to $37.4 million, or 67 cents a share, from $8.4 million, or 20 cents a share, in the same quarter last year. Quarterly revenue grew to $182.7 million for the first quarter of 1999 from $63.5 million a year ago, priming the company's stock to open near $100 on Wednesday, up over 13 points from Tuesday's close of $86.75, and climb to $119.75, up a blinding 33 points.
BIGGER IS BETTER
The company, only four years old, has used cutting-edge technology and a low-cost structure to grab a majority of the execution business from the online brokers.
Much of Knight/Trimark's success is based on its powerful computer network, which can handle more trades than any of its competitors, says Scott Appleby, an Internet analyst with ABN-AMRO Bank (NYSE: AAN). "They can handle the excessive volume when the others can't," says Mr. Appleby. "They also have benefited from the larger investment houses getting out of the market."
But Knight/Trimark also became a leader in the emerging online brokerage market by being in the right place at the right time. The company was founded in 1995 by a group of 27 online brokers who needed a technology-driven company to collect and trade their orders -- an electronic version of Wall Street's traditional "market makers."
"It was the online phenomenon that helped them grow," says Amar Mehta, equity analyst with CIBC Oppenheimer. "They are so huge that anybody seeking liquidity [the ability to find buyers of a stock] has to use them."
How huge? Big enough that they account for as much as 40 to 50 percent of all equity transactions, according to Walter Raquet, Knight/Trimark's chief operating officer. Knight/Trimark is executing over 306,000 trades a day, whereas its nearest rival, a Charles Schwab (NYSE: SCH) subsidiary called Mayer & Schweitzer, executes approximately 200,000 shares per day, according to records supplied by the two competitors.
Raquet attributes Knight/Trimark's success to its bare-bones approach to trading. For example, the company based itself in the relatively unglamorous location of Jersey City, New Jersey, because it was able to lease space at $15 a square foot, much cheaper than the rates charged on Wall Street. It also runs the Knight School, an educational program that educates its employees about technology's effects on the market, and it employs a large number of in-house software developers to build trading systems.
MAKE YOUR OWN OPPORTUNITY
The company has also succeeded in carving out a unique niche. It sits between traditional market makers, which wheel and deal large blocks of stock on Wall Street, and the technology-driven electronic communication networks (ECNs), which use computer networks to match buyers and sellers of stocks.
Last year, Knight/Trimark took market-making business from Merrill Lynch (NYSE: MER). The traditional brokerage dropped nearly half of the equity issues it was executing as a market maker because profit margins were shrinking as rule changes and technology-driven trades lowered the price spreads on stock prices. Knight/Trimark saw the opportunity to make up for shrinking profit margins with the volume being generated by the online brokerage boom.
Additionally, many online brokers took stakes in Knight/Trimark when it was founded, making it in their best interest to send their orders to the company. This helped the company seal its hold on the online market.
Unlike ECNs, which use technology to connect buyers and sellers of stocks and then charge a fee for the transaction, Knight-Trimark actually buys and sells its own blocs of stocks to earn profit. In many cases, the huge market it creates can lower the buy/ask spreads of stock trades even more efficiently than the ECNs.
Knight's profits run about a penny a share on large trades, but the pennies add up on the enormous volume. In March, for example, the company traded 3.6 billion shares of stock, according to Mr. Raquet.
"Our product is superior to the ECNs," says Mr. Raquet. "If an ECN has 100 shares out there, we'll have 1,000. We always have more market orders. The spread is a myth. We make up our difference in the profit and loss on transactions."
LEAVE THE NITE LIGHT ON
These approaches have given Knight/Trimark a reputation as a scrappy, no-nonsense kind of place. According to Mr. Mehta, Its president, Ken Pasternak, spends much of the day at his desk on the company's trading floor, where he can watch the profit and loss of every trade in the house.
It's likely that other companies -- including Meyer & Schweitzer and perhaps even ECNs such as Datek's Island or Reuter's Instinet -- may try to emulate Knight's business model. For example, Meyer & Schweitzer also happens to be based in Jersey City and prides itself on the use of efficient technology.
For the moment, though, the company is the undisputed leader in the execution of online trades. And if the earnings results continue to grow, the NITE symbol is likely to remain a familiar glow on stock traders' screens. |
