One more reason why JBOH sux: "Instinet has also been in talks with both the Big Board and Nasdaq about creating a central order book to collect all Nasdaq orders. Such a book could put most ECNs out of business. Indeed, Instinet has been playing down the ECN part of its business and playing up the service its sales
traders provide to institutions in recent years. Instinet could also decide to
register its ECN as a stock exchange, giving it access to lucrative
market-data fees.
The whole article:
Instinet Plans to Broaden Trading
In Off Hours for 'Retail' Investors
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
Small investors have been hearing about trading on Instinet for years. It
might not be long before they, too, can play with the big boys.
Instinet Corp., the dominant player in institutional trading of Nasdaq Stock
Market stocks, and publicly best-known for its "after-hours" trading for
institutions, is looking to tap indirectly into the booming business of
individual online trading, during and outside regular market hours.
"We're interested in partnering with any e-broker that wants the best
execution," Doug Atkin, chief executive officer of Instinet, said in an
interview. "We are basically saying if you want best execution during the
day and after-hours, you should come to Instinet."
The small, or "retail," investors would not access Instinet directly. Rather,
they would send their orders via subscribing brokers, including online
brokers, who would then automatically route them to Instinet. Retail
investors would continue to pay commissions to their own brokers.
Instinet, a unit of Britain's Reuters Group PLC, operates the U.S.'s largest
electronic communications network, or ECN. It is trying to take advantage
of concerns over the quality of execution delivered by Internet brokers
while at the same time respond to upstart competitors, such as Island
ECN, that have grown rapidly by focusing on retail investors.
An ECN matches a buyer to a seller in return for a commission, whereas
market makers use their capital to buy directly from and sell to investors,
earning the spread between their bid and asked prices. (When an ECN
can't find an internal match, it will normally post an order in the Nasdaq
system.) In the fourth quarter of 1998, ECNs accounted for 29% of the
trading on Nasdaq, according to Putnam, Lovell, de Guardiola &
Thornton Inc., an investment bank specializing in financial services, with
Instinet accounting for about two-thirds of that. (Market-share data,
however, are muddied by disputes over how to count trades.) ECNs
account for a far smaller share of New York Stock Exchange-listed
trading.
Since its birth in 1969, Instinet, which originally stood for Institutional
Networks Corp., has catered primarily to institutional fund managers
seeking a way to trade with each other without dealer intervention. It also
receives business from broker dealers as well, but those dealers have
generally not put retail orders on Instinet because of the effort.
But retail volume, driven by the online trading boom, is growing far faster
than institutional volume. That volume has gone not to Instinet but to
market makers and several other ECNs that sprang up in the wake of new
order-handling rules imposed on Nasdaq by the Securities and Exchange
Commission. The largest new arrival is Island, owned by Datek Holdings
Corp., an Internet broker. Another is Archipelago Holdings LLC, in which
both E*Trade Group Inc. and Goldman Sachs Group Inc. have equity
stakes. Another ECN, Eclipse Trading Inc., hopes to tap retail demand for
after-hours trading later this summer.
Instinet will be competing with all those ECNs by entering the retail
market. It will also be competing with "wholesale" market makers that
trade vast volumes of Nasdaq stocks sent to them by online brokers.
Those market makers usually pay for the orders they receive, and that
practice has come under scrutiny recently.
There is concern that online brokers may be sending orders to market
makers that pay them most for order flow, or in which they have an
ownership interest, with execution quality a secondary consideration.
Among the largest wholesalers are Knight/Trimark Group Inc., in which
E*Trade and Ameritrade Holdings Corp. have ownership stakes, and
Mayer & Schweitzer, a wholly owned unit of Charles Schwab Corp.
In a speech Tuesday, SEC chairman Arthur Levitt warned online brokers
that they "simply can't let payment for order flow or other relationships or
inducements determine where they do business. That's why I have directed
our examiners to focus in on firms' order-routing practices in an
examination sweep." Online brokers say they hold their market makers to
strict execution-quality standards.
Mr. Atkin says Instinet will not pay for order flow or compete on price:
"We will not be a low-commission broker." Rather, Instinet will argue it
offers customers better executions, because its large institutional business
makes it easier for a buyer to find a seller, and because, like all ECNs, it
does not trade for its own account.
"Instinet will ... allow a retail order to interact with an institutional order
without capital getting in between," Mr. Atkin says.
Instinet says it accounts for 40% of the volume in Nasdaq's 10 largest
stocks, and 20% of the volume in its 100 largest.
Mr. Atkin said he could not announce any broker participants yet in its
retail venture.
Instinet will take orders in both Nasdaq and New York Stock Exchange
stocks, and take orders after hours as well, Mr. Atkin said. Retail
investors will also be able to enter orders for Instinet's 6:30 p.m. Eastern
time crossing session, in which buyers and sellers are matched at the
closing price on the primary market, and perhaps for other crossing
sessions to be held hourly through the evening.
Mr. Atkin said Instinet had not pursued retail business because "we've
grown up in the institutional space." Instinet's institutional franchise may
also be affected by rules that just went into effect barring it from hiding
institutional orders from the public market when they are better than prices
available elsewhere.
But Mr. Atkin said those factors had no bearing on the firm's decision to
pursue retail business. It has been inspired partly by recent CNBC
newscasts of Instinet's pre-hours and after-hours trading sessions. He says
the firm gets 400 to 500 phone calls and Web "hits" a day from retail
investors wanting to trade on Instinet.
Instinet has also been in talks with both the Big Board and Nasdaq about
creating a central order book to collect all Nasdaq orders. Such a book
could put most ECNs out of business. Indeed, Instinet has been playing
down the ECN part of its business and playing up the service its sales
traders provide to institutions in recent years. Instinet could also decide to
register its ECN as a stock exchange, giving it access to lucrative
market-data fees.
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