Just as Nasdaq prepares to roll out its SuperMontage trading system, a major rival has appeared. Instinet will now account for 22% of transactions in Nasdaq-listed stock, strengthening its position versus the exchange – but its long-term future is still not assured. Instinet’s parent Reuters has got the best deal, diluting its holding without creating confidence problems.
Online trading platform Instinet will buy its rival Island for $508 million in stock.
Instinet, Reuters’ majority-owned online trading platform, has agreed to buy rival Island for $508 million in stock. The merged firm will account for nearly 22% of trading in Nasdaq-listed stocks, making it the second biggest trading network for these stocks after Nasdaq itself.
Nasdaq is clearly concerned about the threat from the likes of Instinet. Next month, it launches upgraded trading system SuperMontage, which was strategically designed to keep alternative networks at bay. However, Nasdaq may have shot itself in the foot: it looks like SuperMontage may have been a driving factor behind the Instinet/Island deal.
So in trying to reclaim ground with its own brand of alternative trader, Nasdaq increased the focus on its weaknesses. Instinet’s customers can trade stocks directly through the trading network, without the need for exchanges or brokers – depriving Nasdaq of trading fees. The potential damage it could cause to Nasdaq may even win Instinet concessions from the exchange.
But while Instinet is in a strong position relative to other networks, the weak market and associated slump in trading have caused problems throughout the industry. In addition, Instinet’s technology platform is older than many of its rivals. Adding Island’s systems could cut costs and improve flexibility – although a very tight strategic focus is required to extract ROI from such integration jobs.
However, the deal is certainly good news for Reuters. The deal cuts its Instinet stake from 83% to 62%, and the media group may also receive a $207 million special dividend. Reuters has been looking to exit Instinet and focus on its core media business for some time – and this deal allows it to cut its holding, without facing the confidence issues that would arose if it sold up in the open market.
Related research: Datamonitor, 2001: Online Stock Trading in Europe 2001
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