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March 1, 2002

Island Pulls the Plug. Instinet Next?

By Gregory Bresiger

Island ECN, which recently topped thepoll as the largest ECN as measured by Nasdaq volume, may be attempting to outflank its would be competitor.

Island said it is cutting its execution fees dramatically, from 2.5 cents to 1.9 cents per 100 shares. It is increasing its liquidity rebate from 10 cents to 11 cents for 100 shares.

Observers say the move by Island could help entice more order flow away from Nasdaq. The cut was ordered because the firm wants to consolidate its strength in the market, the Island officials said.

It is one of several signs that Island is becoming a more scrappy competitor with Nasdaq. The most potentially damaging blow is Island's decision to report most of its Nasdaq trades to the Cincinnati Stock Exchange, the computerized-market based in Chicago.

The move means that Island would no longer submit most of its trade reports to Nasdaq's Automated Confirmation Transaction (ACT) service.

Market Regulation

For its part, the Securities and Exchange Commission said it would raise no objections. Its only concern was with regulation, according to Annette Nazareth, director of the agency's market regulation division.

Island said it was encouraged by Cincinnati's plan to rebate 75 percent of revenue from market data - 50 percent of that to the customer, 25 percent to the broker. (Island says it will rebate two-thirds of market data to the customer, split evenly on both sides of a trade. It works out at 5 cents each to the buyer, the seller and Island.)

Nasdaq officials downplayed the departure of Island's business. Dean Furbush, executive vice president, Nasdaq Transaction Services, says Nasdaq "budgeted" for it in the second quarter.

Furbush vowed that Nasdaq would be an effective competitor. But ECN officials, notably Archipelago President Michael Cormack, say it is blow to Nasdaq.

The move of Island to the Cincinnati Stock Exchange, says Cormack, shows that Nasdaq's tape revenue is "portable."

The Island ECN was not the only ECN with plans to torpedo Nasdaq. Instinet - which accounts for some 10 percent of Nasdaq share volume and was recently overtaken by Island as the largest ECN - may begin reporting its trades away from Nasdaq, according to Instinet CEO, Doug Atkin.