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Instinet Sharpens Tool to Slice into NYSE Market Share

Seeking to capitalize on the NYSE's investigation of specialists, Instinet plans to roll out a tool to increase the ECN's market share in listed-stocks.

In response to the New York Stock Exchange's investigation into specialist firms for possible trading violations, Instinet -- one of the largest electronic-communications networks (ECNs) -- is escalating efforts to capture market share in listed stocks.

Instinet plans to roll out a new electronic tool that will simultaneously represent a customer's order both on the floor and "upstairs" via the electronic marketplace.

"It allows us to automatically place a certain number of shares down on the floor and constantly replenish that slice of the customer's order, while at the same time, we expose that order to the electronic-upstairs marketplace," explains Ed Nicoll, Instinet's chief executive officer.

The tool -- which for now is called Automated Market Interaction -- is being utilized by Instinet's own agency-trading desk on behalf of institutional customers who call in orders over the phone. Instinet is tweaking the internal tool and beta testing it with institutional customers to use directly on their own terminals. The company expects to roll out the product over the next four months, says Nicoll.

The new technology will work like this: If a customer gives Instinet an order to buy one million shares of IBM, Instinet might send a 10,000-share slice down to the floor, while exposing the entire order upstairs in an anonymous way. "If the 10,000 shares is executed on the floor, that 10,000 (shares) would automatically be replenished," explains Nicoll. At the same time, Instinet would work to find a natural buyer and seller for the customer, upstairs, using its large network of institutional customers, he says.

Miranda Mizen, senior analyst at TowerGroup says: "This is a great way to have your order in two places without risking overexposure. This is a way of dual peddling in several places," she says. "You maximize the chance of execution, but you're not overexposed and you won't over trade," which is of particular interest to portfolio managers who can't take the risk of executing the same order twice. "It's a way to take advantage of the richness of Instinet functionality and being exposed to the floor which has 80 percent of the volume," she adds.

Instinet --- which currently has 30 percent of the share volume in Nasdaq stocks, and 4.5 percent in U.S. exchange-listed stocks -- is counting on the tool to help augment its share of listed trading.

"That's a big target for us. We're looking for areas to grow our business. There's no secret about that," says Nicoll.

One analyst, however, is not that optimistic about the prospect of ECNs making a significant dent in NYSE volume. "All the ECNs have been trying to (gain) market share on the listed side," notes Sang Lee, manager of the Securities and Investments Practice at Celent Communications. "Firms like Brut, Archipelago, Instinet, Island; everyone has been trying to get into the listed market. Really, the only success has been on the ETF (exchange-traded fund) side, especially in the QQQs (a contract based upon the Nasdaq 100 index of stocks) because the underlying are Nasdaq stocks," says Lee, which the ECNs have a high market share in.

"In terms of individual NYSE-listed stocks, no one has succeeded in gaining market share away from them," he says. "I don't know if what Instinet is up to, or anyone else is up to, is going to make any difference in the short term," he says. "The NYSE has managed to hang onto much of their market share, where close to 80 percent of their share volume occurs on the floor," adds Lee.

Nicoll concedes that ECNs have had a hard time providing an alternative to the NYSE marketplace. "What customers are afraid to do is go off of the exchange, because they're afraid they're going to miss the market down on the floor. Buyers and sellers want to go to a place where there are other buyers and sellers. So it's hard to develop an alternative to a marketplace that has such a dominating market share," he admits.

Targeting the NYSE, Nicoll contends that Instinet will be able "to match these large orders upstairs in a much more efficient way than the customer has also experienced down on the floor where they complain that specialists jump ahead of them." 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

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