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06-05-2003 08:20 PM |
Quote:
Instinet plans for world domination
By Gracian Mack
June 30, 1999
Wall Street loves to guess what a company is going to do next. Instinet , which has participated in a flurry of corporate actions over the past few months, has lately been the topic of much cigar-and-brandy conversation.
A division of the U.K.-based Reuters Group , Instinet appears to be gearing up to become a financial services kiosk -- the America Online of financial information and stock transaction execution, if you will. There has even been talk of an Instinet spin-off and IPO.
"We wouldn't want to speculate on things that haven't happened, would we?" says Richard Schenkman, chief operating officer of Instinet.
Perhaps not, but considering recent events, Mr. Schenkman's firm appears to be up to something. Instinet's newly named 36-year-old president and chief executive officer, Douglas Atkin, is trumpeting a new direction for the unit. In a June 14 speech at the TIBCO Strategic Directions Conference, he announced that Instinet.com would become a "virtual global stock exchange" that's open 24 hours a day.
GOING GLOBAL
On June 15, Instinet announced a new technology that allows users to trade fixed-income securities over its network. The new system, called Instinet Fixed Income, will offer real-time trading of U.S. Treasury bonds and European debt to traditional institutional customers such as pension funds and money managers. Rumored talks with a variety of potential partners, including Yahoo , has suggested that small investors may be invited to enter trades on its systems. That particular bit of gossip began with a recent London Times article that was later refuted by Instinet. However, Yahoo does already have a strategic alliance with parent company Reuters to disseminate stock quotes and news.
In May, Instinet acquired an 11.4 percent stake, worth $20 million, in W.R. Hambrecht & Co. , an investment bank that operates auction-style initial public offerings. Hambrecht's OpenIPO system, launched in February, provides an electronic underwriting service designed to give individual investors an opportunity to participate in initial public offerings.
Instinet is also part of a consortium that is acquiring a majority interest (approximately 54.4 percent) in Tradepoint Financial Networks, the London-based electronic stock exchange, and it recently opened offices in Australia and increased its presence in Asian, Canadian, and Latin American markets. These are steps toward Mr. Atkin's "industrial-strength real-time global trading system."
GROWING COMPETITION
Instinet brings securities buyers and sellers together via a proprietary electronic communications network (ECN), and parent company Reuters provides a 24-hour-a-day feed of financial information to a worldwide customer base. Mr. Schenkman plans to tie Reuters' flow of financial information to Instinet's executable network and have all of that available via the Internet. Such a new business model would be crucial to the long-term growth of the company, he says.
The question for Instinet may be how it uses Reuters' resources -- and existing Internet partnerships with the likes of Yahoo -- to beat back aggressive competition in the ECN market.
When Instinet was founded back in 1969, it was virtually the only game in town for institutions to trade NYSE stocks among themselves through a "computerized" network. Instinet now includes over-the-counter-stock, market makers, and debt securities. Its ECN currently handles up to 20 percent of Nasdaq order flow.
However, advances in technology have trimmed Instinet's market share. It must now contend with a plethora of sprouting ECNs, notably Bloomberg 's Tradebook and Datek Online 's Island ECN . There are others, too. Last year, Bear Stearns launched its Strike ECN. More recently, Merrill Lynch and Goldman Sachs announced plans to launch their own ECN.
New players cast a different light on Instinet's 20 percent slice of Nasdaq order flow, because that percentage has not grown in at least two years. This means they are not gaining market share. Where once Instinet held uncontested sway on the institutional marketplace, at least nine other companies are now in the fight for market share. Along with a change in the way it gathers and communicates with customers, the pricing of its services will have to change as well.
Bill Burnham, an analyst with Credit Suisse First Boston , says Instinet likely sees Island as its closest threat, and would like to "stop Island from getting so much critical mass that it would start to attract institutions," which are Instinet's core market.
"Look, we are in the business of the globalization of business," says Mr. Schenkman. "That involves ... an unbundling of financial services business, which gives the investor more control. We are best equipped to do that. We continue to become more equipped to do that. We will do that."
Sounds like a man who is aware of his competition. And Wall Street eagerly awaits his company's next move.
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