Video: Nasdaq’s strategy

updated 4/22/2005 7:01:01 PM ET 2005-04-22T23:01:01

The Nasdaq Stock Market Inc. is purchasing Instinet Group Inc.’s electronic trading network for $934.5 million, a move designed to improve Nasdaq’s position as competition grows among the world’s stock markets.

The long-rumored announcement Friday came two days after the New York Stock Exchange said it would merge with Archipelago Holdings Inc., operator of the ArcaEx electronic trading market, a surprise move that boosts the NYSE’s electronic trading offerings and increases its competitiveness against Nasdaq and other markets.

Instinet’s trading technology — considered the fastest and best in electronic stock trading — was a major factor in the deal, which also gives Nasdaq increased market share in its own listed stocks as well as NYSE-listed shares, and access to more trades and liquidity.

“This transaction will position us to offer investors increased choice in listed stocks on other markets as well as increased liquidity in Nasdaq-listed stocks. (Instinet) is the ideal partner for us to offer investors the best outcome for their trades,” said Bob Greifeld, Nasdaq’s chief executive officer, said at a press conference at Nasdaq’s Marketsite in Times Square.

Instinet’s technology will become the predominant electronic trading platform in the U.S. equity market, and the Nasdaq will abandon its own system to standardize on Instinet’s platform.

Instinet’s broker-dealer arm, to be run by Instinet CEO Ed Nicoll, will be sold to a private equity group, Silver Lake Partners, for $207.5 million. Another Instinet subsidiary, which manages commission rebates, will go to the Bank of New York for $174 million. The deal also include $562 million in cash that Instinet currently holds, bringing the overall value of the sale to just under $1.9 billion.

Shares of the Nasdaq Stock Market surged $3.11, or 29.2 percent, to $13.76, while Instinet shares fell 48 cents to $5.22. Instinet said in a release that investors would receive approximately $5.44 in cash per share. British financial information company Reuters Group PLC, which owns 62 percent of Instinet, said it expects to receive $1 billion from the deal; Reuters stock was up $1.44 at $49.20.

To finance the Instinet purchase, Nasdaq will take on $955 million in new debt, to be paid within six years. Nasdaq Chief Financial Officer Dave Warren said, however, the company will save $100 million in costs over the next two to three years, and plans to pay off the debt before it comes due.

The NYSE deal and the Nasdaq purchase put the two markets — the 213-year-old icon versus the slick, computerized upstart — into a head-to-head competition that will likely result in a variety of new investment products and lower transaction fees for both institutions and individual investors. Greifeld said the NYSE-Archipelago deal was not a factor in the acquisition, which was described as a long, hard auction process.

Greifeld took the opportunity to jab at the larger, older competitor — and the human specialists who manage floor auctions on the NYSE — in extolling the Nasdaq’s all-electronic trading systems. “We do not anoint anyone as a specialist or monopolist. It is the best of both man and machine,” he said. “We certainly accept the flattery of their imitation” in adopting an electronic platform, Greifeld added.

The NYSE was more subdued in addressing its rival after the agreement was announced Friday.

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“We congratulate NASDAQ and Instinet on their announcement. We welcome all competition in this new environment,” CEO John Thain said in a statement.

The NYSE-Archipelago merger gives the venerable NYSE known worldwide for its trading floor, a strong electronic trading platform that it would have taken years to otherwise develop. The combined company, NYSE Group Inc., would also make the not-for-profit NYSE a for-profit enterprise.

Analysts have said a Nasdaq-Instinet deal would help stave off increased competition from the combined NYSE Group Inc. Nasdaq itself claims 50 percent market share in trading its own listed stocks — though analysts say that number is around 25 percent to 30 percent — and 15 percent volume in NYSE-listed stocks. Both ArcaEx and Instinet have about 25 percent market share each in Nasdaq stocks and a minimal share in NYSE stocks.

The NYSE has more than 80 percent share in its own listings, and does not trade Nasdaq stocks on the floor of the exchange. But with ArcaEx, Nasdaq’s archrival now has a vested interest in not only maintaining its own listed shares, but also stealing market share from Nasdaq. The Instinet deal, in addition to improving Nasdaq’s trading technology, will also shore up Nasdaq’s market share in its own stocks.

Greifeld added that the Nasdaq will have a “maniacal focus” on taking additional market share in NYSE-listed stocks.

The past week’s mergers leave two giants standing in what used to be a much larger field of smaller electronic markets and regional exchanges, analysts said.

“We have seen the last logical consolidation in the U.S. equity marketplace,” said Raymond Killian, CEO of ITG Inc., which runs its own electronic trading systems that access electronic markets like Nasdaq. “We’ve seen two behemoth markets created over the last couple days. I think it’s great for institutional investors because you’ll see deeper, more liquid markets and lower costs as these two slug it out.”

Greifeld would not address specific changes in the price of transactions on the Nasdaq, but said the company planned to remain compeitive. “We are currently the price leader in the space, and we plan to remain in that position. We will use that to guide the integrated pricing decisions we need to make,” he said.

Nasdaq will issue $750 million in six-year corporate bonds and another $205 million in convertible notes to cover the costs of the deal. Silver Lake Partners and buyout firm Hellman & Friedman LLC, Nasdaq’s largest shareholder, will receive warrants to purchase additional shares of Nasdaq.

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