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January 1, 2000

Instinet Pledges Court Fight To Protect ECN Access Feesby Sanford Wexler

By Sanford Wexler

Under pressure from smaller competitors and facing a much bigger challenge if certain ECN access fees are banned, Instinet remains undaunted as it steps up its effort to become a super-international ECN.

Most recently, Instinet inked a deal to acquire Lynch, Jones & Ryan, a New York-based provider of commission recapture programs for pension plan sponsors.

The largest ECN, as measured by share volume, Instinet is staying the course with other franchise-building acquisitions, as well as a move to thwart possible efforts by the Securities and Exchange Commission to eliminate non-customer access fees. These fees, charged by ECNs to non-subscribers, have been singled out for possible elimination by SEC Chairman Arthur Levitt.

"We will fight in court if we have to," said Doug Atkin, Instinet's president and chief executive. Exchanges are able to charge brokers and brokers are able to charge clients for their services, he said. "Call us [an exchange or a broker]. But either of them are permitted to charge for their services," Atkin added.

Young Turks

While other ECNs have been eating some of Instinet's ECN lunch, the loss of revenue from access fees could be a bigger financial blow for the Reuters Group's unit, experts note.

Instinet faces competition from young ECN turks like REDIBook, The Brass Utility, Bloomberg Tradebook and others. Instinet had pretax profit margins of 31 percent on revenues of $634 million in the first nine months of last year. But Instinet is losing market share to rival ECNs, a factor that has contributed to the bouncy stock price of its parent company, Reuters Group.

Atkin is undeterred. "I think we still have enviable margins," he said. "Any margin slippage is largely due to investment spending to get into new businesses. We are trading more shares than ever."

Instinet trades about 170 million shares a day, handling about 20 percent of Nasdaq's volume. Instinet's expansion is part of a plan to shore up its institutional business while developing an online retail arm. International execution, research and other capabilities give it a strong edge over pure breed ECNs, analysts note.

Acquisitions by Instinet

May 1999

W.R. Hambrecht & Co., an online auction firm for IPOs.

Acquires 11.4%. interest.

July 1999

Tradepoint Financial Networks, a London-based electronic stock exchange.

Leads a consortium of investors, including American Century, Goldman Sachs, J.P. Morgan,

Morgan Stanley Dean Witter and E*Trade Group, that purchases a majority interest.

Archipelago Holding, an electronic communications network. Acquires 16.4% interest.

September 1999

E*Trade Group, second largest online retail discount broker.

Teams up with E*Trade to offer after-hours online trading to retail clients.

November 1999

Lynch, Jones & Ryan, Inc.

Purchases the world's leading provider of commission recapture programs for pension plan sponsors.

Source: Instinet