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December 1, 2001

Instinet Allows in The Competition Intermediaries Acceptable at Venerable ATS

By Peter Chapman

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  • Instinet Allows in The Competition Intermediaries Acceptable at Venerable ATS
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Instinet's recent acquisition of direct access broker ProTrader caps a sweeping change in the electronic matchmaker's access strategy.

For the past few years, Instinet has been quietly uninstalling its dedicated terminals from traders' desktops.

Faced with an explosion in the number of order management systems, direct access applications and other electronic communications networks, Instinet has decided to permit its customers to access its services through intermediaries. It will no longer require them to connect through Instinet's proprietary software.

The move reflects not only the growth in the number of front-ends, but also in electronic trading destinations. Traders want equal access to Instinet's competitors. And those third party front-ends will give it to them.

Long the preeminent electronic alternative to Nasdaq for institutions and market makers, Instinet is now, in effect, one of the pack. It is still the largest, trading 200 million shares per day, but it now splits the market with a couple of dozen alternative trading systems. And its share of that market is declining.

Although Instinet's strategy dictates the disappearance of its signature blue screens, it is betting more traders will access Instinet.

"You will see a bigger presence of Instinet on people's desktops," said Jean-Marc Bouhelier, an executive vice president in charge of technology and product development at Instinet. "That presence will be through whatever technology the client wants."

All told, 3,100 Instinet customers worldwide access the broker via 18,000 screens. In the U.S., its 1,900 customers include about 700 broker dealers and most of the top 500 money managers.

Nasdaq market makers account for nearly 70 percent of the volume traded on Instinet's limit order book.

For years considered a closed system' whose only point of entry was through proprietary software and hardware, Instinet began opening up, circa 1998. It started by permitting some of the larger Nasdaq market makers and institutions to integrate its offering into their proprietary OMSs. In December 1998, it announced it would be accessible through third-party vendors. Today, traders can get to Instinet through systems sold by Eze Castle, Macgregor, Longview, FlexTrade, Lava Trading, NYFIX, Belzberg, Davidge, Royalblue, various direct access brokers and other ECNs. (They cannot reach Instinet through SunGard Trading System's BRASS order management system, although talks on possibly allowing this are ongoing.)

Instinet's biggest deal to date was the $150 million purchase in October of ProTrader, a direct access broker. ProTrader made its fortune offering daytraders and small hedge funds fast access to multiple ECNs.

Agency Broker

Instinet intends to offer the front-end to hedge funds and other institutional traders. As the Instinet book will be only one destination on the system, the move adds weight to the ECN's claim of being an "agency broker." It has long claimed to be a neutral broker and not an exchange.

However, nearly 80 percent of Instinet's revenues derive from internal matches on its limit order book.

Instinet subscribers can access other ECNs today through Instinet's smart order routing' functionality, but analysts do not consider it top drawer technology. Even Instinet's Bouhelier admits: "We were faced with the challenge of renewing our technology for some of our client segments."