Instinet Has Tough 4th Quarter While Boosting Nasdaq Market Share

Against a backdrop of uncertainty over the launch of SuperMontage, Instinet--the largest electronic communications network--reported an increase in Nasdaq-listed stocks traded over the system. Results reflect the merger with the Island ECN in September. Instinet's share of Nasdaq-listed equity volume was 29.7 percent in the fourth quarter, while its share of U.S. exchange-listed stock volume was 4.5 percent, according to the company.

"It's a good eight or nine percent increase over the last couple of months, which confirms our belief that Instinet is the only viable alternative to SuperMontage at this point," comments Sang Lee, Manager of the Securities & Investments group at Boston-based Celent Communications.

The Instinet news was disclosed on Tuesday when Instinet Group Incorporated reported a net loss of $112 million for the fourth quarter of 2002, compared to net income of $46 million for the fourth quarter of 2001. Revenues in the fourth quarter totaled $267 million, a decline of 23 percent from $349 million in the fourth quarter of 2001. For the year ended December 31, 2002, Instinet reported a net loss of $735 million, compared to net income of $145 million for 2001.

Acknowledging that the largest ECN had a "tough quarter," Ed Nicoll, Instinet's chief executive officer, commented in the earnings release: "but we are moving ahead to position (Instinet) for long-term growth and profitability." Nicoll's statement also emphasized the company's continuing focus on reducing costs by $100 million in 2003.

Reacting to the news that Instinet was not profitable and that earnings went down while Nasdaq volume was up, Celent's Lee says: "There are no surprises here." Lee says, "the volume was in line with what he was hearing from other people, particularly from Nasdaq." Because the entire ECN space is in flux due to the launch of SuperMontage, and conflicting volume statistics are being thrown out, Lee warns that it's difficult to get accurate volume statistics from the ECNs now.

According to Lee, the combination of Instinet and Island accounts for 30 percent of Nasdaq volume. "That has increased obviously since the launch of SuperMontage. The key now is whether or not Instinet can maintain (the level) as SuperMontage ramps up," says Lee.

Before the merger with Island, Celent estimated that Instinet accounted for 13 percent of Nasdaq's share volume. Post-merger, it estimates that the combined Instinet/Island ECN's market share of Nasdaq-listed share volume was in the low twenties. According to the earnings report, of the total 36.8 billion U.S. equity-shares traded through Instinet in the fourth quarter of 2002, 31.2 billion were Nasdaq-listed shares, of which the Island ECN accounted for 13.4 billion of this Nasdaq-listed share volume.

While Instinet/Island has been successful in increasing its market share of Nasdaq-volume, the company faces management challenges. On Monday, for instance, Instinet announced that Mark Nienstedt resigned his position as president of the company. Though he will continue to serve as an officer of the corporation and remain a member of the board of the corporation and provide services to the CEO and senior management as appropriate. "But the position will remain unfilled at the present time." Meanwhile, Lee notes that since the merger, most of the top senior management positions have gone to former Island/Datek executives. "If Instinet actually acquired Island, things should work the reverse but it really hasn't happened that way," says the analyst.

And, the ongoing talk about continuing the focus on cost reduction for 2003 is also ominous. "I don't know if that means a foreshadowing of further layoffs or consolidation of departments." Instinet already reduced its workforce by 300, or about 17 percent of its full-time employees, both domestically and internationally, and consolidated office space within the New York City area.

Still, Lee says it remains to be seen how Instinet will achieve the expected level of cost reductions without resorting to more layoffs. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio