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2HRS2GO: Knight/Trimark to blame for 3Q miscue

Knight/Trimark's earnings shortfall shouldn't shock too many people. The only surprise is that it caught the electronic market maker by surprise.

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CEO Kenneth Pasternak blamed "greater-than-expected seasonality" and a "fundamental shift" in the market for producing earnings that will be, at best, about 36 percent below forecasts. But Knight/Trimark had plenty of warning.

Since July, industry observers such as well known analyst Bill Burnham (formerly of CS First Boston, now with a venture capital fund operated by Ziff-Davis parent Softbank) have been predicting lower trading volumes for the third quarter. Several online brokers' second quarter results indicated slowing growth. TD Waterhouse saw trading declines almost two months ago.

Yet three months of signs failed to get through to Knight/Trimark, which processes much of the volume generated by online brokers. No one expects perfect visibility from a company, but at least guide analysts into the right area code. That's part of your job when you're managing a publicly-traded company.

And a fundamental shift in the market? Not really. Many analysts already see the figures rebounding. Knight/Trimark will be fine, as long as it can defend against competition. Not that there's any guarantee of that -- Electronic Communications Networks such as Island and Archipelago have already made inroads.

But overall industry trends aren't changing. More people will trade online.

The company caused some of its own problems. Merrill Lynch analysts Sean Chin and Judah Kraushaar point out that Knight/Trimark tried to boost businesses by executing all trades at the midpoint between buying and selling prices. That kind of stability might have made a few brokers happy, but it cut Knight/Trimark's margin without increasing business.

PaineWebber analyst James Preissler believes Knight/Trimark may have made too little or even lost money on too many transactions. "With average revenue per trade off so substantially, we believe there may be a higher probability that NITE was on the wrong side of far more trades than has been its historical norm, which is typically just a handful per quarter," Preissler writes in a research note.

No one can stop the sea, and no one can turn around an seasonal trend by himself. A slowdown in Internet trading was inevitable, given the unprecedented volume during the first six months of this year.

Instead of fighting the tide, Knight/Trimark should have told analysts to lower their sights back when trading declines became evident. The stock would have taken a hit, but not as much relative to the overall field, which was in the doldrums a couple of months ago. Now the stock market seems to be on a gradual rebound, so investors have other places to put their money.

At least for the moment.

Other issues:

  • i2 Technologies
  • (Nasdaq: ITWO) The e-commerce software vendor says third quarter results came out better than expected, and that's reason enough to return to the stock, says Robertson Stephens analyst Kash G. Rangan. "ITWO has mostly overcome issues in sales attrition, headcount expansion and execution that have somewhat shrouded the stock," he writes in a research note released this morning.

    Executives for i2 see a clear revenue stream for the fourth quarter and next year, so Rangan now predicts 66 cents per share earnings on sales of $737 million for next year, compared to his previous estimate of 64 cents earnings on sales of $715 million. i2's brand as a supplier of software for supply chain management is solid, Rangan says.

  • Novellus Systems
  • (Nasdaq: NVLS) Intel reports quarterly earnings tomorrow, but today's Novellus report will give a preview for chip industry watchers. First Call consensus predicts a third quarter profit of 46 cents per share for the maker of semiconductor manufacturing equipment. Novellus and its peers were already seeing a resurgence; it'll be interesting to see if the outlook now includes even more demand stemming from the Taiwanese earthquake.