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January 1, 2004

Breaking Instinet in Two

By Peter Chapman

Plunkett, though, says he would like to see an increase in the VAB's blended rate of 1.5 cents. "But the way to increase that is not to raise prices," the exec stressed. "It's to get more customers using the higher priced premium services and for the client to find value in our premium services."

Plunkett adds that Instinet's sales traders will be taking a more proactive role vis-a-vis customers. That means more outbound telephone calls delivering information and research.

For a long time, Instinet never even acknowledged it had sales traders. It called those pros responsible for working with the buyside "facilitators." The reason, it says, was to put its do-it-yourself customers at ease.

Sophisticated

To those sophisticated customers who need very little assistance and only want access to Instinet's technology, the phrase "sales trader" conjures up images of leaked information. Instinet has had the delicate task of pleasing both those customers who want to hide their intentions from everybody and those who needed sales trading.

"There is always a tension between those customers who want the human sales trader and those who want total anonymity," Nicoll explained. "Instinet walked a fine line. For some people we sales traded and for others we didn't. We never defined it or were clear about it."

Nicoll now says it is better to be clear about who does what. In its trading room, the facilitators sit separately from the sales traders. The firm also recently published a sales trader "Code of Conduct" manual that it sent to clients. One topic concerns protecting client information.

Instinet now has about 150 front-office staff in the U.S. It is hiring sales traders. The build up on the desk, as well as on the floor, is calculated to make Instinet a more powerful player in the handling of block orders.

But despite the need to match competitors' order handling prowess, Nicoll maintains there is a critical difference between Instinet and other institutional brokerages. "We will deliver our network of bids and offers to our customers," he said.

Instinet is introducing new technology that will emulate the actions of a human trader. That is, one who attempts to cross his customer's order with that of another customer's upstairs while simultaneously representing the order in the public market. In a departure from standard practice, though, Instinet will allow its customers to see its other customers' quotes.

"We will not intermediate between our customers when it is not necessary," Nicoll said. "Our job is to act as agent. We're happy to show one customer the other side of the trade."

Often traders will try to cross orders upstairs rather than bring them down to the floor of a stock exchange or trade them in the Nasdaq market. If successful, the cross acts to lessen market impact, or adverse price reaction, as well as provide the broker with two commissions. Usually, the trader working the order keeps his book of orders to himself though.

Instinet intends to make that book available to its customers. They would not know the orders' origin, but would see prices and size.