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January 1, 2004

Breaking Instinet in Two

By Peter Chapman

But, in pounding the table for his cause, Instinet's CEO is not just championing INET. Instinet, the institutional brokerage, could garner more listed order flow as well. "If there are viable electronic markets to probe and utilize in the listed environment," Nicoll said, "we will get much narrower spreads. We will be able to do more blocks upstairs and away from the floor."

The trading of listed shares is not an insignificant issue for Instinet. Most large brokerages catering to institutions, and practically all agency brokerages, handle more listed than Nasdaq order flow. That's because the buyside trades more listed than Nasdaq names. Perhaps three-quarters of the orders on a typical large buyside desk are for listed shares.

Instinet is best known as a Nasdaq shop. Most of the 90 million shares per day handled by the brokerage side are in Nasdaq names. Nicoll says a "significant" portion of those 90 million shares is listed flow, but will not specify exactly how much.

The exec does say he does not consider 20 percent to be a "significant" number though, suggesting Instinet is trading more than 18 million listed shares per day.

At the same time, the broker is taking steps to lift its profile in the listed world. A year ago, Instinet exercised an option to pay about $600,000 for ownership of a New York independent floor broker called Harborview. (Instinet acquired about 10 percent of Harborview when it bought agency broker Lynch Jones & Ryan in 2000.) It also bought an additional seat at the New York Stock Exchange, giving it a total of four seats.

A New Crew

After acquiring Harborview, Instinet fired the entire staff and installed a new crew of traders. "We completely turned over all the personnel because we didn't believe they were of the quality to serve our customers," Nicoll said. The Harborview staff is working strictly with Instinet's sales traders, but may eventually do double duty as a direct access broker for Instinet's customers.

Instinet has made similar adjustments to its sales trading staff, firing some and hiring others. "Some of our sales traders grew up in an environment in which Instinet was the only liquidity pool around," Nicoll said. "They didn't necessarily have the trading expertise that is demanded of the position."

"We have upgraded that position," he added. "We have a much higher quality staff today than we had five years ago."

Some on the buyside expect to be paying more for that upgrade. "What they are saying," said one buyside trader who did not wish to be identified, "is what you got for free before, which is a sales trader, you will now pay for."

Mike Plunkett, co-president of the VAB, says Instinet is not raising prices, but has tiered them in recent months to reflect its customers' differing needs. Those who use sales traders already pay more than those who just want electronic connectivity, Plunkett explains.