Financial stock of year may be Instinet
Electronic share network targets hedge funds
marketwatch.com
By Thom Calandra, CBS.MarketWatch.com
Last Update: 11:49 AM ET Jan. 7, 2002
SAN FRANCISCO (CBS.MW) -- Instinet Group, the only publicly traded electronic trading exchange, will one day join forces with another stock market or share network.
Until then, most investors are overlooking Instinet's Nasdaq-traded shares (INET: news, chart, profile). The stock of this profitable company, reflecting about $2.5 billion of market cap, is a league away from a yearly high set at Instinet's initial offering in May. Word that rivals Archipelago and Redibook were merging their electronic share networks rattled holders of Instinet stock late last year. Besides, Instinet's quarterly profits at the time were sinking like a ship, down more than a third from a year ago.
Sprinkle on what looked like decreased market share for Nasdaq-traded shares, factor in a decline in per-share fees on trades because of all the whiz-bang competition in electronic market-making, and no wonder shareholders were ejecting their Instinet shares.
As seasoned investors know, this is the time in the cycle to be buying financial companies that have a technology edge, not selling them. Actually, a few investors are starting to realize this. Instinet's stock has picked up almost a point since we featured it on "CBS MarketWatch Weekend" on Sunday. View the video with Thom Calandra and Susan McGinnis.
To be sure, Instinet, a New York-based unit of Reuters Group (RTRSY: news, chart, profile) (UK:RTR: news, chart, profile), won't be unveiling devices that allow share-trading or market-making during your morning shower, or from inside your automobile. Still, Instinet, by virtue of international connections with London's Reuters, snags about a quarter of all fees from outside the United States. Plus, unlike rivals such as Archipelago and Island, Instinet has a fully developed system that matches fixed-income orders.
Instinet, with about $700 million of cash, much of that from the initial offering, is likely to extend its reach into Europe and other regions that entice American investors. Instinet already allows traders to dip electronically into several European exchanges. A connection to the ailing American Stock Exchange in New York, for example, could turn Instinet into a brand name among individual investors in this country and abroad. Instinet executives also must be considering an alliance or outright purchase of another share network, perhaps Island.
The fact that some investors, beating Instinet shares down to below $10 recently, prefer to focus on Instinet's loss of Nasdaq trading volume to those pesky rivals and to Nasdaq's small-order execution system is typical of those who look just at numbers and not the big picture.
But go to any hedge fund or professional trader these days and they'll tell you Instinet is where you are most likely to receive a matched trade for your order. Matched trades are great for traders because they increase the chances you'll get the price you want in a purchase or sale.
For Instinet, a matched sale within Instinet's so-called liquidity pool is all gravy. Fatter fees, and that's no tease. Other share networks - the professionals call them ECNs - feed more of their orders to competitors. J.P. Morgan Chase estimated Instinet's so-called matched share volume was 13 billion in the September quarter of 2001. Island, with 8.9 billion, and other ECNs trailed.
By the way, late last year, Instinet bought ProTrader, an electronic brokerage service that targets hedge funds, a fast-growing force in the manic trading of U.S. stocks. With electronic brokerage stocks such as E-Trade (ET: news, chart, profile) and AmeriTrade (AMTD: news, chart, profile) up 10 percent in the first trading week of the year, it is clear that some investors realize the low points in the stock-trading cycle are when you buy shares of these much maligned companies. See Instinet's share volumes.
Instinet's Nasdaq market share, hovering between 9 percent and 10 percent, almost certainly will test new heights as the ProTrader business kicks in. Whether Instinet's boom comes during a Nasdaq bust-up or the continuing rally in tech stocks is anybody's guess.
At $10.50 or so, Instinet's shares sell for about 13 times estimated earnings of 80 cents a share for 2002. Find me another technologically advantaged financial stock that cheap and I'll salute you. Instinet will report its quarter before the U.S. markets open Feb. 12. |
