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October 1, 2012

Instinet Beats Out Its Sister Company

By John D'Antona Jr.

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  • Instinet Beats Out Its Sister Company

Once again, Instinet survives. Instinet, which began as an institutional matching engine in the groovy 1960s, was declared the winning brokerage entity for Nomura Holding's trading services.

The trading downturn forced the giant Japanese bank to choose which brokerage subsidiary's trading unit would stay in business: Instinet or Nomura's global brokerage divisions?

Nomura Holdings folded its entire equities trading business into agency broker Instinet. This happened in a bid to cut costs amid the current global commission slump. All execution services, including cash, programs and electronic products, for the Americas, Europe, Middle East, Africa and Asia ex-Japan, will be melded into Instinet. The move won't affect research and prime brokerage.

Instinet prevailed for two simple reasons: It has good technology and an established customer base, given it's been operating since Richard Nixon was president.

Nomura learned it's not easy building a business from scratch in the current market-though the firm extended itself financially to build a U.S. broker-dealer. Despite Nomura's algorithmic trading push in the U.S. and elsewhere, its algos never gained sufficient client traction. Meanwhile, the high-touch desk, according to sources, stuck its neck out for clients with its wallet by aggressively committing capital to win business-only to have its head handed back with huge loss ratios.

Instinet, on the other hand, keeps on ticking. From its roots in the late 1960s as Institutional Networks, it was purchased by Reuters in 1987-and what a timely buy it was. Instinet became a cornerstone of the Nasdaq market, when Nasdaq was operated by dealers. Instinet essentially became the market's interdealer broker-institutions could access it, but not retail. When the order-handling rules went into effect, Instinet was the only ECN on which dealers could post their best-priced limit orders. Competition here came later with competing ECNs, but these were boom times for Instinet.

Reuters took Instinet public in 2001, keeping 62 percent of the firm. To compete with Nasdaq and its proposed SuperMontage, Instinet purchased the ECN Island in 2002. Three years later, Nasdaq looked to expand its market share and bought Instinet in 2005. It kept the ECN and sold the agency brokerage unit to Silver Lake Partners. Nomura bought Instinet for $1.2 billion from Silver Lake in 2006.

There were several areas in which Instinet and Nomura offered duplicate services in equities. Both had electronic desks, algorithms and research. Nomura acquired much of its equity platform when it bought some of the assets of now-defunct Lehman Brothers. The rest came after a buildup that began in 2009, which included large guaranteed contracts that made the firm the talk of the industry.

That investment in people is why market pros earlier this year speculated that Nomura would win out in a head-to-head, not Instinet.

"They both offered electronic and high-touch trading businesses, so in essence both were competing against one another for a shrinking slice of the commission pie," a brokerage exec told Traders Magazine. "In the end, it made sense for one group to shut down, and despite what I thought, it was the Nomura guys who lost out."