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 exactly is insider trading?

    An "insider" is any person who possesses at least one of the following: 1) access to valuable non-public information about ... Read Answer >>
  2. What are some high-profile examples of wash trading schemes?

    Examine the RBC Bank wash trading case and explore the potential wash trading challenges presented by high-frequency trading ... Read Answer >>
  3. What are examples of inherent risk?

    Explore two famous examples of inherent risk with the collapse and ultimate bankruptcy of Lehman Brothers and the downfall ... Read Answer >>
  4. What is the difference between wash trading and insider trading?

    Explore the differences between two trading practices, wash trading and insider trading, and find out why these practices ... Read Answer >>
  5. What impact did the Sarbanes-Oxley Act have on corporate governance in the United ...

    Learn the effects the Sarbanes-Oxley Act has on corporate governance in the United States, including strict disclosures, ... Read Answer >>
  6. Who are the most famous people convicted of insider trading?

    Learn about some famous people who were convicted of illegal insider trading and find out about the reasons for their criminal ... Read Answer >>
Related Articles
  1. Active Trading Fundamentals

    The Short and Distort: Stock Manipulation in a Bear Market

    High-quality stock reports needn't be confused with stock manipulators' dramatic claims.
  2. Term

    What's Anti-Money Laundering?

    Anti-money laundering involves the laws and regulations designed to prevent criminals from generating income through illegal activities.
  3. Credit & Loans

    5 ATM Scams That Can Break The Bank

    Don't get scorched by ATM thieves who want to burn a hole in your wallet.
  4. Your Clients

    Top Ways to Guard Against Financial Elder Abuse

    Financial elder abuse is rampant. Here are some steps that you and your family can take to help guard against financial scams that target older investors.
  5. Investing News

    Cybercrime: #1 Disruptive Threat to Markets? (JPM)

    Discover why asset managers see cybercrimes as the most disruptive threat facing financial markets and learn what is being done to protect your data.
  6. Savings

    5 ATM Scams That Can Break The Bank

    Here are five common ways ATM users get ripped off.
  7. Economics

    Why Enron Collapsed

    Enron’s collapse is a classic example of greed gone wrong.
  8. Professionals

    4 Must Watch Films and Documentaries for Accountants

    Learn how these must-watch movies for accountants teach about the importance of ethics in a world driven by greed and financial power.
  9. Investing Basics

    4 Iconic Financial Companies That No Longer Exist

    Learn how poor management, frauds, scandals or mergers wiped out some of the most recognizable brands in the finance industry in the United States.
  10. Active Trading

    What Is A Pyramid Scheme?

    The FTC announced it had opened an official investigation of Herbalife, which has been accused of running a pyramid scheme. But what exactly does that mean?
RELATED TERMS
  1. Money Laundering

    Money laundering is the process of creating the appearance that ...
  2. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise ...
  3. Black Money

    Money earned through any illegal activity controlled by country ...
  4. Financial Action Task Force (FATF)

    An intergovernmental organization that designs and promotes policies ...
  5. Banker Trojan

    A malicious computer program designed to gain access to confidential ...
  6. Black Market

    Economic activity that takes place outside government-sanctioned ...

You May Also Like

Hot Definitions
  1. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  2. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  3. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  4. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
  5. Call Option

    An agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument ...
  6. Economies Of Scale

    Economies of scale is the cost advantage that arises with increased output of a product. Economies of scale arise because ...
Trading Center