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December 1, 2002

Island and Instinet Versus the SuperMontage? New Combo and Nasdaq Ponder Many Possibilities

By Gregory Bresiger

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  • Island and Instinet Versus the SuperMontage? New Combo and Nasdaq Ponder Many Possibilities
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The duel is raging in the trading world and everyone is watching.

Which one will crack first? Nasdaq's SuperMontage or the new Island and Instinet combo, which represents a huge pool of liquidity?

So far Nasdaq officials say its SuperMontage trading platform is a tremendous success and they privately dismiss Island and Instinet's determination to follow a trading strategy that excludes SuperMontage. So far Island and Instinet, the only electronic communications networks not to use Nasdaq's controversial new trading platform, say they're doing quite well.

"They [Island/Instinet] are making an effort to protect their franchise. At this point, Island has no reason to join SuperMontage," said Aldo Parcesepe, a longtime trading executive with Bear Stearns. He added that Island/Instinet wants to become a market center for OTC stocks in the same way that the Big Board is the market center for listed stocks.

Nevertheless, Parcesepe and others in the business believe that only one entity is going to win the battle.

"What I believe is that the industry can only afford one dominant player at a time. And either Island/Instinet or Nasdaq is going to be the dominant player. And, although a few months ago I thought SuperMontage would win, now I'm not too sure," according to Octavio Marenzi, managing director of Celent Communications, a Boston-based financial consulting firm.

Island has been recording orders through the Cincinnati Stock Exchange and Instinet has been using the Alternative Display Facility (ADF). "We don't need to have SuperMontage to prosper," said Andrew Goldman, a spokesman for Island/Instinet.

His evidence? As of mid-November, a few months into the SuperMontage operation, Island still was recording huge amounts of the biggest OTC stocks, including Intel and Cisco Systems. For example, for the week of Nov. 11, Island had a 30.1 percent share of some 385 OTC stocks that are trading on the SuperMontage, Goldman said.

"It's far too early in the process to know what is going to happen and who is succeeding and who is not. With only 25 percent of the stocks folded into SuperMontage, no one should make any judgments at this point," said a spokesman for Nasdaq. When will there be enough evidence for a fair analysis? Nasdaq officials said not until June of 2003.

Order Service

Market observers say that Island/Instinet's plan of going around SuperMontage may work. But privately those working with Nasdaq dismissed the numbers, saying that, although market share was rising, revenue per share was on the decline. "Their clients are going to push them to change," said the source. "Either that or the Island is going to go backwards to when it was just an electronic order service.

Still, the putative success of the Island/Instinet plan could put market makers and other trading firms on the spot: Is SuperMontage the place that one goes to obtain the best, fastest executions?