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How Knight Gave Traders a Heads-Up

See update below...

Shortly after the market opened Wednesday, as trading started to get wacky, Knight Capital sent this message to its clients:

Flying Colour Ltd. | Photodisc | Getty Images

Due to a technology issue, Knight is experiencing a delay in processing orders of Listed securities. We ask that you seek an alternate destination for the execution of these securities until further notice. Order handling and execution of OTC securities is not affected. Stay tuned for further updates Knight

Considering that its clients are traders, that was sending out a giant “sell” signal on itself. Knight’s shares started to fall quickly, and the activity didn’t go unnoticed in the options pits.

Jon Najarian of OptionsMonster says that within 30 minutes he was telling his clients that there had been aggressive purchases on Knight puts — a bet the stock will tumble. Normally 138 puts trade a day; but yesterday saw a whopping 93,977.

Yet with the trading day well underway, Knight was declining comment to reporters at CNBC who asked about the message. It wasn't until around noon that Knight confirmed that “a technology issue occurred in the company’s market-making unit....”

Why didn’t it tell the public at the same it was telling its trading clients?

Good question. Knight hasn’t responded to my inquiry.

My Take: Knight may have been putting its clients first, but it’s also a public company.

Update: A trader we know says he got the heads up from Knight on its trading problem. He figured it was a bad sign that a trading company couldn't trade, so he shorted the stock. As the drama around Knight unfolded, he shorted it again and was still riding that position when we spoke Thursday.

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