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Knight rebounds from Herzog hit

Shares of Knight Trading Group (Nasdaq: NITE) recovered slightly in afterhours trading after the stock fell earlier on news that Merrill Lynch (NYSE: MER) would buy a market maker for itself.

Knight, the largest market maker for the tech-heavy Nasdaq, rose to 30 5/8 in afterhours activity after the company said it gets just 0.8 percent of its order flow from Merrill. Knight also said that despite what some reports claimed, Merrill's Broadcort Capital unit clears trades only for one Knight subsidiary, Knight Securities. Trades for Knight Capital Markets are cleared by National Investor Services, part of TD Waterhouse (NYSE: TWE).

During Tuesday's regular trading, Knight's stock price fell 11/16 to 30 1/4.

On Tuesday morning, Merrill Lynch confirmed earlier reports that it would buy privately held Herzog Heine Geduld for more than $913 million in stock. With the addition of Merrill's trading volume, the Herzog business would become the second largest market maker on the Nasdaq, behind Knight and ahead of Charles Schwab (NYSE: SCH).

Knight shareholders shouldn't fear Merrill, said Robertson Stephens analyst Scott Appleby, who reiterated a "buy" rating on Knight. "We believe ... NITE will retain its position at the top of the league tables," Appleby wrote Tuesday.

The combination of Merrill and Knight could appeal to institutional investors, but that entity would be less attractive to many retail brokerages, Appleby said.

"We believe the merger actually could create an opportunity for NITE to gain trading volume from the online and discount brokers who compete directly with Merrill," Appleby wrote.

Knight already gets much of its business from online brokers such as E*Trade Group (Nasdaq: EGRP).

Merrill said it would continue sending some business to Knight, under an agreement signed last year.

Some analysts also speculated that the purchase of Herzog makes Knight an attractive takeover candidate for Merrill's rivals.>