Instinet Acquires Island ECN

Competition is about to heat up for the Nasdaq Stock Market after two rival electronic-exchange platforms agreed to merge.

In a marriage of an older trading network with a newer one, New York-based stock trading network Instinet Group Inc. is acquiring the fast-growing electronic-trading platform Island ECN in a stock deal valued at $508 million.

The acquisition would give Instinet Group, which is 83 percent owned by financial information giant Reuters PlC, a leg-up to compete with the Nasdaq Stock Market for order flow, especially as the Nasdaq prepares to unveil its new “SuperMontage” trading system this year.

The deal combines Instinet, a 33-year-old player in providing a proprietary stock trading network for institutional investors, with Internet-era electronic communication network (ECN) Island in their hunt for market share both have lost since the Internet boom went bust.

Since it began in the mid-1990s, Island ECN has grown into a preferred online trading platform for day-traders and retail investors who jumped into equity markets as federal regulators encouraged market makers to provide individual investors with the same access to pricing and tradeflow as institutional traders.

By the end of the decade, and as Internet access spread among consumers, Island had grabbed about a 10-12 percent share of the trading volume of all Nasdaq-listed companies, putting is slightly ahead of the less-nimble Instinet trading system in volume terms.

Together, Island and Instinet said their customer base would be spread across a range of market segments, from over-the-counter securities (small to large cap), to exchange-traded funds, to other securities listed on US, European and Asian exchanges. With their customer base about to combine, Instinet is able to tout an even deeper pool of liquidity to traders.

It also comes as Nasdaq readies its new trading software, SuperMontage, the electronic exchange’s aggressive bid to lure back some of the trading business it lost out to Island and Instinet in the tech boom years, and seen by many in the market as a competitive threat that Instinet needed to address.

Mark Nienstedt, acting president and CEO of Instinet Group, said the combined company would position Instinet for improved profitability in the months and years ahead.

Ed Nicoll, the chairman of Island, is to assume the role of chief executive officer in the combined company. Mark Nienstedt is to be president and also continue as CFO, the company said. Matthew Andresen, one of the Island’s founders and its CEO is to become chief operating officer of the combined company’s ECN division. Jean-Marc Bouhelier, currently chief operating officer of Instinet, is to become chief operating officer of the global agency brokerage unit. Andre Villeneuve will continue as Chairman of the Board of Instinet.

“This transaction joins together two extremely complementary franchises,” said Nicoll, including the scalability of Island’s Internet-era network, and Instinet’s deep institutional order flow.

As part of financial terms of the deal, Instinet said it would also pay a $1 per share dividend to its shareholders, which amounted to about $250 million in cash.