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July 31, 2002

An Open Door at Instinet: Smart Routing Changes Face of Electronic Broker

By Peter Chapman

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Instinet is no longer a closed shop. The ECN is promoting a new direct access front-end that makes it easy for customers to access other trading venues, as well as the Instinet book.

The product's launch suggests Instinet's evolution from a quasi stock exchange into an agency brokerage is almost finished.

Portal, as the system is called, incorporates "smart-routing" technology. That allows a trader to swiftly search the entire market for an execution. It also replaces OMS, Instinet's legacy front-end, which gives traders only rudimentary out-bound routing functionality.

Closed System

Smart routing has been a standard feature of many ECN, vendor and electronic agency broker systems for the past few years. But until recently Instinet did not embrace the technology, a decision that cemented its reputation as a "closed" system.

Instinet began life 30 years ago as a quasi stock exchange for institutions in competition with the New York Stock Exchange. Orders came in and either filled, posted or cancelled. Unfilled orders did not travel to other market centers.

In recent years, though, Instinet has made moves to refashion itself as an agency brokerage, seeking the best execution point for its customers even if that wasn't its own book. But the technology supporting that book, its biggest money-spinner, was not particularly adept at routing out, even its own execs admit.

OMS does allow traders to route out, but the process is cumbersome and time consuming. Traders must type out the instructions. Then they must also wait while the system scans the entire book before routing away.

Portal eliminates that "stickiness," Instinet execs say, with the smart routing and a more flexible point-and-click GUI. Portal's GUI (graphical user interface) was borne of gr8trade, the direct access front-end Instinet acquired when it bought ProTrader last year. The system (pronounced, "great trade") was designed to meet the demands of rapid-fire day traders.

But smart routing and a sporty GUI aren't enough for Instinet's institutional clients. Unlike day traders, who continuously buy and sell small lots in rapid-fire fashion, the pros need to move large blocks undetected. To accommodate them, Instinet made several sophisticated block trading algorithms available with Portal. By using such features as pegging, spraying, reserve and discretionary pricing, big ticket traders can camouflage their intentions.

Still, all of these features - a good GUI, smart routing and smart algorithms - are quickly becoming standard on direct access systems built for the buyside. Instinet needed an ace to stand out.

Instinet's trump card is a book widely considered to hold more large orders than any other ECN. "We have more institutional liquidity than anyone else," boasted Mike Plunkett, a senior vice president and managing director in Instinet's hedge fund group. "That's the difference."

To date, 126 firms are using Portal, says Plunkett. The bulk are hedge funds. The rest are traditional money managers that Instinet terms "actives." In total, Instinet services 700 hedge funds and 250 actives, according to Plunkett.

For Portal, Instinet has set its sights on a universe of 1,500 hedge funds, those with assets under management of at least $5 million.

Here is a laundry list of some key features:

Point-and-Click Trading