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May 31, 1999

Breaking Through the Complacency Barrier

By Michael L. O'Reilly

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Merrill Lynch has a name many people know. So do Morgan Stanley and PaineWebber. Instinet Corp., on the other hand, is relatively unknown to individual investors on Main Street.

But that may not be the case for much longer.

Since its inception as Institutional Networks Corp. in 1969, Instinet has been known among institutional investors and broker dealers as one of Wall Street's most active and innovative companies.

Last month, Instinet announced its plan to work with a brokerage firm or a number of brokerage firms - and allow ordinary investors to trade on its private network. Private investors would also interact with institutional investors and broker dealers for the first time.

The plan by Instinet to access retail order flow is one of many moves in the last eight months under the guidance of Douglas Atkin, its new president and chief executive. After spending six-and-a-half years in London running Instinet's international operations, the 36-year-old Atkin is back in the U.S with plans to reinvent the company.

"I think I was brought to New York by Instinet for a change of focus," Atkin said. "In some ways, Instinet was a bit complacent in its thinking of what was good for the markets. As a firm, we got caught up in our size and in protecting the existing system, because it was good for our short-term profitability. We weren't thinking about what's best for investors, and what's best for us in the long term."

Since Atkin moved back to New York in October, Instinet has announced plans to enter the retail equity and the fixed-income markets, acquired stakes in W.R. Hambrecht & Co. and Tradepoint Financial Networks, considered after-hours trading and registering as a stock exchange. The agency broker has also been rumored to be partnering with everyone on Wall Street, from Nasdaq to the New York Stock Exchange.

Some reviews on Wall Street stop short of an endorsement.

"People had written off Instinet as dead," said Bernard L. Madoff, president of New York-based third-market firm Bernard L. Madoff Investment Securities. "Now Instinet is looking to reinvent itself and make some moves. They have terminals all over Wall Street and a great brand name. You can't write them off."

The Retail Market

While Instinet's every move and every rumored move has been well-publicized, many on Wall Street believe its intention to tap into the retail market may be its most significant initiative.

James D. Dougherty, a research analyst at Prudential Securities who follows Instinet's parent - London-based Reuters Group - said Instinet's move into the retail equity business was not surprising. "Now you have online trading being a big deal, and Instinet wants to be a part of that," he said.

But Dougherty noted that there's nothing "monumental here. Instinet has always moved along when business demanded something."

Currently, most online, retail orders are executed by wholesale trading firms like Jersey City's Knight/Trimark Group and Herzog, Heine, Geduld. These firms, in turn, pay online brokers for order flow. Instinet would allow online brokers to enter orders directly into Instinet's private network, allowing those orders to interact with other retail brokers, institutions and broker dealers.