NASDAQ to Acquire Instinet

UPDATED: The battle between NASDAQ and the New York Stock Exchange (NYSE) for new market listings heated up again Friday, with NASDAQ announcing it would purchase Instinet, the electronic communications network (ECN), for about $1.88 billion in cash.

The news comes two days after NASDAQ’s rival, the NYSE, announced it would merge with ECN Archipelago Exchange (ArcaEx) and eventually go public, a clear shot across NASDAQ’s bow. NYSE’s aggressive move to embrace electronic trading comes at a time when new regulations for market makers are favoring the electronic exchanges over the traditional methods of the NYSE.

Now, NASDAQ has upped the stakes with news that it has agreed to acquire Instinet Group Incorporated in a pure technology play to grab Instinet’s ECN.

The acquisition was a three-way business deal: NASDAQ took the ECN technology, valued at $934.5 million, and sold Instinet’s Institutional Broker division to Silver Lake Partners for $207.5 million; and Bank of New York entered an agreement to purchase Instinet’s Lynch, Jones & Ryan subsidiary for $174 million on or before the close of the NASDAQ transaction.

For Bob Greifeld, NASDAQ president and CEO, the complex deal was a chance for the company to provide a medium for trading stocks regardless of the exchange it’s listed on.

“We see, as a combined entity, a once-in-a-lifetime opportunity to dramatically grow trading on companies that are listed on the [NYSE],” he said in a press conference Friday.

Regulation NMS (National Market System), proposed by the Securities and Exchange Commission (SEC), is causing plenty of maneuverings among the exchanges. William Donaldson, chairman of the SEC, said earlier this month that Regulation NMS is designed to enhance competition among markets and enhance opportunities for the interaction of investor orders.

The new rules are seen favoring the electronic exchanges, according to industry officials.

“We could not be more excited about what this transaction means for our ability to gain market share,” Greifeld said. “On the listings business, we’re very excited about the fact that we’ll be competing against an electronic New York marketplace.”

Fund Manager Richard A. Herr of Keefe, Bruyette & Woods recently told The Wall Street Transcript that “the revision of the national market system and how this may affect the New York Stock Exchange as well as the NASDAQ market has far-reaching effects on the entire securities brokerage industry. Currently it appears we are going to have new regulations that favor electronic over floor-based auction markets and best-price protection, also known as the trade-through rule.”

And that’s good news, said David Gardner, co-founder of the Motley Fool. For years, the NYSE and NASDAQ have been competing against each other for years for listings and volume, he said, until companies like ArcaEx and Instinet came along and said investors don’t need to be bound by trading stock on one exchange or another.

“An open, transparent electronic market just makes sense; to be able to see the best buy and sells, the best order offers out there as opposed to channeling it to someone that you can’t hold accountable,” Gardner said

The transition to an open electronic exchange is going to be much more difficult for the NYSE to adapt to; while the NYSE uses computers to handle trades with brokers, the bulk of its activities are conducted on the floor of the NYSE headquarters in New York City, much the same as it has done for the past 212 years.

The NYSE’s move to an ECN doesn’t mean the death of its auction-style on-the-floor model, said John Thain, the NYSE’s CEO, at a press conference Wednesday announcing the ArcaEx merger. Instead, the exchange will look at ways to combine the strengths of the floor model with the ECN model.

This hybrid, he said, will give customers the chance to trade either on the floor using the hybrid model or directly with ArcaEx.

“This is absolutely not the end of the floor; we will continue to build out our hybrid model,” Thain said. “We continue to believe that our market space offers many advantages to investors and frankly, this is an opportunity for us to offer choices to our customer base.”

Trading in shares of both Instinet and of NASDAQ was suspended early Friday, but in afternoon action, NASDAQ shares were up by 27 percent to $13.53. Shares of Instinet were down just over 8 percent at $5.22.

Reuters , which owns about 62 percent of Instinet
Group , has agreed to vote its shares in NASDAQ in favor
of the transaction, officials said.

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