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Brokers Flee Knight Following Trading Blunder

Some of the nation’s largest brokerage firms have stopped doing business with Knight Capital Group, removing a critical lifeline for the market-maker as it struggles to contain the fallout from a $400 million trading mistake.

Thomas M. Joyce, chairman and chief executive officer of Knight Capital Group Inc., second from the right, waits to ring the opening bell at the New York Stock Exchange in New York, U.S., on Tuesday, May 25, 2010.
Jin Lee | Bloomberg | Getty Images
Thomas M. Joyce, chairman and chief executive officer of Knight Capital Group Inc., second from the right, waits to ring the opening bell at the New York Stock Exchange in New York, U.S., on Tuesday, May 25, 2010.

Citigroup , the nation’s third largest bank, has placed a temporary freeze on routing some trades through Knight Capital , according to a person familiar with the matter. Other large banks are also scaling back trading through Knight, but, like Citi, are doing so at the brokerage firm’s request, according to market participants.

Others are taking action on their own.

Scottrade, one of the nation’s biggest retail brokers, said in a statement Thursday afternoon that it was “not utilizing Knight for equity execution services.” Knight handled more than 30 percent of Scottrade’s trading for NYSE and Nasdaq securities in the second quarter, according to regulatory filings.

Vanguard, another retail trading titan, said Thursday in a statement that while it recognized Knight as a “long time and valued partner” it too had decided to route brokerage orders “exclusively to other vendors.”

Online broker TDAmeritrade, which handles roughly 320,000 client trades per day, has also stopped doing trading business with Knight Capital. The company said it was running “internal tests” to verify that clients would not experience execution issues should it decide to route trades through Knight in the future.

ETrade, a retail brokerage giant with some 4.3 million accounts, was taking similar precaution by routing orders around Knight, according to a person familiar with the matter.

For Knight, whose business is built on liquidity and trading, it’s a potentially crippling blow.

“The order flow is the driver of the business,” said Rich Repetto, an analyst with Sandler O'Neill, who stressed that the firm was going to have to seek outside liquidity help in order to navigate the current crises.

Shares of Knight Capitalcratered in Thursday trading, falling 63 percent.

A spokesperson for Knight did not return multiple calls for comment. A spokesperson for Citi declined to comment.

—By CNBC's Jesse Bergman, Kayla Tausche, & Margaret Popper

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