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WHAT WAS THE KEY TO KNIGHT'S
PROGRESS IN 2003?
Hard work, and an unwavering commitment to our clients. In particular, I want to thank Knight's employees, who put in a tremendous amount of effort, and our clients, who stood by us as we strove to repair Knight's business and reputation. We tackled three out of four legacy issues by instituting new management, moving our international operations out of the red and taking additional reserves for excess real estate. We're continuing to work on the fourth issue relating to a private arbitration claim and regulatory inquiries. In Equity Markets in particular, we grew our business serving institutions by adding personnel and enhancing our products and services. We also adjusted the structure of our trading operations, namely those serving broker-dealers, to decimals. This fix was made in advance of the market's rebound in early 2003 and complemented the growing reception of our institutional offering.
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WHAT ARE THE MOST IMPORTANT MARKET STRUCTURE ISSUES ON THE TABLE TODAY?
Knight actively promotes a level playing field on which to compete, with a standard set of rules for all market participants. In light of this, we were pleased with the selection of market structure issues presented on February 24, 2004 by the SEC for comment. We agree that regulators should revise the trade-through rule, which today makes price the priority in trading listed stocks regardless of what the investor actually wants. Another part of this discussion is the capping of fees charged to market participants by ECNs for accessing their liquidity, even while market makers like Knight cannot charge such fees. Third, we'd like to see the end of sub-penny trading, which was introduced with decimalization and has no benefit for investors. In addition, we believe consistent rules across all exchanges would eliminate locked and crossed markets and lead to a more orderly marketplace.
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WHAT DO YOUR CLIENTS LOOK FOR IN A TRADE EXECUTION PROVIDER?
Execution quality is first and foremost. Our broker-dealer clients are obligated
to seek best execution on behalf of their customers. Knight continues to be one
of the largest destinations for broker-dealer order flow in part because our
execution quality statistics are extremely competitive. Our institutional clients,
likewise, would vote with their feet — and their order flow — if we weren't
providing high-quality executions. We do, and that's why we are able to grow
this business. Clients would also go elsewhere if we didn't make every effort
to provide the best service. This is why we restructured around client needs.
Finally, strong relationships define success in this industry. Knight has employees
who have built long-term relationships over their years in financial services,
and many of those clients followed our recent recruits to Knight.
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WHY HAS KNIGHT SURVIVED THE SHAKEOUT IN THE INDUSTRY WHEN OTHERS DID NOT OR CONTINUE TO STRUGGLE?
Knight's scale and competitive offering helped us to successfully ride it out. Investors and market structure have changed, leading to tighter spreads and lower commissions, intense pressure on the infrastructure of financial services firms and, ultimately, consolidation. To remain relevant going forward, liquidity providers will need to constantly reinvent themselves. That's what Knight is doing by building a business serving institutions from the roots of our independent business model and already-strong broker-dealer offering. At the same time, we're tuned in to what our clients want and we seek ways to answer their needs.
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YOU SAY INVESTORS HAVE CHANGED. HOW? AND HOW HAS KNIGHT CHANGED WITH THEM?
Over the last few years, both individual and institutional investors have grown more sophisticated, gained access to better technology, and shortened their investment time horizons. Knight understands how new trading patterns, and the way investors interact with the market today, impact order flow. We use this knowledge to help our clients trade wisely and efficiently.
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WHAT HAS BEEN THE IMPACT OF INCREASED SCRUTINY BY REGULATORS AND LAWMAKERS ON THE FINANCIAL SERVICES INDUSTRY?
It will take time for the entire industry to regain the credibility lost because of the actions of a few. More worrisome is the potential impact on the capital formation process itself. Fortunately, the unbundling of research and investment banking plays to one of Knight's strengths. Unlike our bulge bracket competitors, Knight's primary business is providing high-quality trade execution services. Our trading isn't bound to or part of other products and services — what you see is what you get and what you pay for. As the focus on best execution increases, we welcome it. We believe our trade executions are extremely competitive and we're in an ideal position to serve our clients.
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WHAT IS THE NEXT STEP FOR KNIGHT? HOW DO YOU FOLLOW YOUR SUCCESSES TO DATE?
In 2004 we're focusing on the basics: leveraging the progress we've made among institutions, further improving operations serving broker-dealers, continuing our examination of our derivatives business, and growing our asset management business. All the while delivering a competitive offering with superior client service. We are eager to put to rest the final remaining issue from the past — the private arbitration claim from a former employee and regulatory inquiries — and to prove that the market environment is not the only driver of our success. Indeed, we look forward to sealing Knight's position as a significant, long-term player in this market.
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