Instinet leads Tradepoint purchase
Investor group buys 55 percent stake in U.K. stock exchange
By Allan Chernoff
CNBC
NEW YORK, May 6 — CNBC has learned that Instinet, a major electronic trading network, is leading a group of investors who are buying control of Tradepoint Financial Networks, an electronic for-profit stock exchange in Britain that trades U.K. securities.
THE DEAL IS AN important first step in the creation of for-profit stock exchanges in the U.S. While U.S. exchanges such as the National Association of Securities Dealers Exchange or New York Stock Exchange derive income from various sources, they are member-owned, not-for-profit organizations that re-invest any earnings back into their operations.
London-based Tradepoint runs an an electronic exchange for trading British stocks on a for-profit basis. It's the kind of model that Instinet and its partners hope to import into the U.S.
“This is the market structure we believe should be in the U.S. in the future,” Instinet CEO Doug Atkin told CNBC. “And we look forward to bringing a for-profit exchange to the United States in collaboration with other people including the big exchanges in the U.S.”
The consortium lead by Instinet will pay about $23 million for a 54.5 percent stake in Tradepoint. Under terms of the deal, signed Thursday morning, the group has an option to increase its stake to more than 60 percent.
The consortium includes: American Century, the mutual fund firm; brokerage firms J.P. Morgan and Morgan Stanley Dean Witter, and Archipelago, an electronic communications network whose major shareholders include Goldman Sachs and e-Trade.
“We saw this opportunity to make an investment in Tradepoint to make a statement about the kind of markets we want for our shareholders,” said Harold Bradley at American Century. “They're efficient, they're fast, they're electronic, they're low-cost.”
NO MIDDLEMAN
‘We look forward to bringing a for-profit exchange to the United States in collaboration with other people including the big exchanges in the U.S.'
— DOUG ATKIN
Instinet CEO
Electronic communications networks like Instinet are revolutionizing stock trading, bringing buyers and sellers together directly through computer systems. They claim to offer better executions than Nasdaq market makers — who act as middlemen and profit from the spreads between buy and sell orders.
Instinet believes a for-profit exchange would save individual investors money.
“We need to continue to bring efficiency for investors,” Instinet CEO Doug Atkin told CNBC. “And we hope that national exchanges and those exchanges in the United States follow suit.”
The electronic communications networks are not registered exchanges. But the Securities and Exchange Commission last month ruled they now may apply to become exchanges. And the SEC is permitting them to operate on a for-profit basis.
Academics like New York University professor Richard Sylla say the change could be good for individual investors.
“If it offers a better price right away some investors will benefit,” said Sylla. “And the result of that competition may be the cost of trading on existing exchanges goes down as well.”
The Tradepoint deal could become part of the revolution in how stocks are traded in the U.S. The fact that some of Wall Street's bluest-chip companies are investing shows they want to have a piece of the action.
The New York Stock Exchange says it has no plans to operate on a for-profit basis. The Nasdaq isn't commenting on the for-profit issue but it says “the evolution of the markets will ultimately result in a structure beneficial to both the marketplace and investors.”
Instinet said on Wednesday it is in talks to open up its existing system to all investors, closing one of the most visible gaps between small and large investors. For the past 20 years, large institutions have been able to trade stocks in a special after-hours session on Instinet while small investors could only look on in frustration. Instinet is a unit of Reuters Group Plc.
ONLINE EXPLOSION
But the explosion in online trading has given small “retail” investors more clout and Instinet wants those customers, both after-hours and during regular trading hours.
Instinet has traded mainly for large investors since its 1969 inception. But it has seen growth at rivals that focus on day traders, like Island, part of Datek Online Holdings Corp. The strategy change comes as Wall Street scrambles to capture an explosion in growth away from traditional stock trading systems, like the New York Stock Exchange and Nasdaq.
Internet trading rocketed in April, with volumes up nearly 66 percent over March's torrid levels, estimates Credit Suisse First Boston analyst Bill Burnham. The cyber-trend is stealing market share from traditional stock exchanges. Nasdaq share volume rose just 10.5 percent and New York Stock Exchange share volumes rose a scant 3.0 percent in the same period, Burnham said. Instinet currently has about 20 percent of the Nasdaq's trading volume.
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