A:

The dotcom boom accelerated many deceitful business practices that first became apparent during the '80s and '90s. Many of these had to do with analyst recommendations being tied with investment banking divisions' interests and other basic conflict of interest problems. One of the clearest examples of a firm putting its own interests above those of its clients was the conduct of the Knight Trading Group.

The Knight Trading Group acted as a market maker for brokerage firms, buying and selling the securities that made up client orders. In this capacity, Knight was handling up to 11% of all buy and sell orders on the Nasdaq during the dotcom boom. The trading group was supposed to facilitate more efficient execution of orders, allowing clients to buy and sell at as close to the current price quotes as possible. At the height of the bubble, Knight Group was often off the posted quotes and frequently late in executing trades, meaning that clients often lost money on trades while waiting for the orders to go through.

This tardiness was more sinister than mere incompetence or network difficulties. A NASD investigation revealed that the company was front running on client orders. The traders at the company would receive large client orders, often institutional, and execute the order in a company or personal portfolio before putting through the client's order. As large orders can push stocks sharply up in a volatile market like the dotcom boom, Knight was profiting from privileged information.

Such a revelation and an investigation took an immediate toll on the company's shares, sending the stock down close to 30%. Because market makers' worth is tied to their reputation, the company's shareholders also launched a lawsuit because the traders' actions and management's lack of oversight destroyed the shareholders' investment. Knight Trading Group was assessed a $1.5 million fine on January 7, 2002, but it continued to face ongoing litigation and damage to its reputation.

For more, see The Biggest Stock Scams Of All Time.

This question was answered by Andrew Beattie.

RELATED FAQS
  1. What's the difference between a market order and a limit order?

    Buy and sell trades with market orders at the present stock price and execute limit orders if the stock price falls within ... Read Answer >>
  2. What lessons did the tech bubble crash give to investors in the Internet sector?

    Learn how investors contributed to the dot-com bust and how Internet services and investing has changed since the market ... Read Answer >>
  3. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
  4. How do financial advisors execute trades?

    Understand how financial advisors normally execute an investor's trades. Learn about the different type of markets and exchanges ... Read Answer >>
  5. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
Related Articles
  1. Financial Advisor

    Manage Your Clients' Expectations

    You can't control how they react to the market, but you can help them understand the reality of the situation.
  2. Managing Wealth

    Asset Manager Ethics: Acting In the Benefit of Clients

    Investment managers should always act to benefit the client. Learn what actions managers should take on a client's behalf.
  3. Financial Advisor

    Asset Manager Ethics: Placing and Managing Trades

    Five guidelines have been created to assist asset managers on the best practices for placing and managing trades in client accounts.
  4. Personal Finance

    Private Banking Vs. Wealth Management: Not Quite the Same

    Discover the various ways in which private banking and wealth management services coincide, as well as the significant differences between them.
  5. Financial Advisor

    Managing Client Expectations in a Volatile Environment

    Managing client expectations during periods of market volatility is challenging. Here are some ways to go about it.
  6. Personal Finance

    When (And How) To Fire A Client

    Firing the clients who take more of your time and effort than the revenue they contribute is a great way to improve your bottom line.
  7. Small Business

    Keeping Clients Through Good And Bad Times

    If you work in the financial industry, the secret to keeping clients happy is to be consistent.
  8. Financial Advisor

    Losing a Client Is Not Always The End of The World

    Losing a client is never pleasant for a financial advisor, but sometimes this is a better outcome than continuing the relationship.
  9. Trading

    Understanding Order Execution

    Find out the various ways in which a broker can fill an order, which can affect costs.
  10. Financial Advisor

    What Is Your Client's Willingness and Ability to Take Risk?

    Financial advisors must carefully consider a client's willingness and ability to take investment risks, including tax concerns and liquidity needs.
RELATED TERMS
  1. White Knight

    A white knight is an individual or company that acquires a corporation ...
  2. Yellow Knight

    A company that was once making a takeover attempt but ends up ...
  3. Black Knight

    A company that makes a hostile takeover offer for a target company. ...
  4. Gray Knight

    A second, unsolicited bidder in a corporate takeover. A gray ...
  5. Firm Order

    1. A market order to buy or sell a security for a brokerage's ...
  6. Lock-Up Option

    A stock option offered by a target company to a white knight ...
Hot Definitions
  1. North American Free Trade Agreement - NAFTA

    A regulation implemented on Jan. 1, 1994, that decreased and eventually eliminated tariffs to encourage economic activity ...
  2. Trickle-Down Theory

    An economic idea which states that decreasing marginal and capital gains tax rates - especially for corporations, investors ...
  3. Derivative

    A security with a price that is dependent upon or derived from one or more underlying assets.
  4. Fiduciary

    A fiduciary is a person who acts on behalf of another person, or persons to manage assets.
  5. Sharpe Ratio

    The Sharpe Ratio is a measure for calculating risk-adjusted return, and this ratio has become the industry standard for such ...
  6. Death Taxes

    Taxes imposed by the federal and/or state government on someone's estate upon their death. These taxes are levied on the ...
Trading Center