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In your article, "It's the @#$%! Market Makers" you said the following:
While investors try to buy at the lowest price and sell at the highest price possible, big market-making firms like Knight Trading Group (NITE) and Herzog Heine & Geduld make most of their money off the "spread," the difference between the price at which they buy a stock from one investor and sell to another.
But Knight does not make most of its money off the spread...
In the 1999 Q4 conference call, Knight CEO Kenny Pasternak said, "Our trading methodologies are volatility capture, not spread capture."
http://www.redherring.com/insider/1999/0422/inv-nite.html
"Our product is superior to the ECNs," says Mr. Raquet (Walter Raquet of Knight). "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."
From the 1999 Annual meeting:
"The reason we will succeed under decimalization is that we are not spread traders; rather, we are inventory managers. We serve our clients by providing them with guaranteed liquidity, which creates inventory opportunities that result in revenues when analyzed over intermediate timeframes. This is what drives our profitability, not the pocketing of spreads."
http://media.vcall.com/archive/ram/onlinetrading/knightsecurities02182000.ram
Sr. VP of Business Development, Lewis Okser, discusses (NITE) from the Online Trading Expo in NYC 2/18/2000. "A lot of people just don't understand our business, even at the analyst's level. OK, an analyst will come in and say, well these people make their money on volume and they're making their money on the spread. But it's absolutely untrue. OK, they never bothered, like this analyst, to come in and talk to us, and see how people make money, what we do to make money..."
Mr. Pasternak told investors in the 1998 prospectus to Knight/Trimark's initial public offering, they would no longer profit primarily on spreads. Rather, they would "take advantage of the profit opportunities represented by each trade."
Jim Jacobson
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