SEC Formalizes Probe at Knight Trading Group

Knight Trading Group Inc. said Tuesday that the Securities and Exchange Commission had begun a formal investigation into allegations of improper trading practices at the largest dealer of Nasdaq stocks.

The Jersey City, N.J.-based firm disclosed in a quarterly report that the SEC issued a “formal order” for investigation, meaning its informal inquiry has been upgraded and investigators now have the authority to subpoena testimony as well as telephone and bank records.

Regulators with the SEC and the NASD, formerly the National Assn. of Securities Dealers, have been investigating an allegation by former Knight executive Robert Stellato that the firm placed its own orders before customer orders for the same stock, a practice known as “front-running.” Stellato oversaw Knight’s trading with money managers.

“We want to be as transparent as possible,” Knight Chief Executive Tom Joyce said in an interview. The regulators “got the last bit of information from us two weeks go. They haven’t asked for anything more in the last few weeks. Everything they’ve asked for they have.”

Joyce said last month that the company had hired the “best law firms” and that a review of trades showed that “no front- running or trading ahead occurred.”

Knight’s shares fell 16 cents to $4.62 on Nasdaq. They have fallen 58% this year.