The NASDAQ Stock Market Inc is purchasing Instinet Group Inc's electronic trading network for US$934.5 million, a move designed to improve NASDAQ's position as competition grows among the world's stock markets.
The long-rumored announcement on Friday came two days after the New York Stock Exchange said it would merge with Archipelago Holdings Inc, operator of the ArcaEx electronic trading market, a surprise move that boosts the NYSE's electronic trading offerings and increases its competitiveness against NASDAQ and other markets.
Instinet's trading technology -- considered the fastest and best in electronic stock trading -- was a major factor in the deal, which also gives NASDAQ increased market share in its own listed stocks as well as NYSE-listed shares, and access to more trades and liquidity.
PHOTO: AP
"This transaction will position us to offer investors increased choice in listed stocks on other markets as well as increased liquidity in NASDAQ-listed stocks. [Instinet] is the ideal partner for us to offer investors the best outcome for their trades," Bob Greifeld, NASDAQ's chief executive officer, said at a press conference at NASDAQ's Marketsite in Times Square.
Instinet's technology will become the predominant electronic trading platform in the US equity market, and the NASDAQ will abandon its own system to standardize on Instinet's platform.
Instinet's broker-dealer arm, to be run by Instinet chief executive Ed Nicoll, will be sold to a private equity group, Silver Lake Partners, for US$207.5 million. Another Instinet subsidiary, which manages commission rebates, will go to the Bank of New York for US$174 million. The deal also include US$562 million in cash that Instinet currently holds, bringing the overall value of the sale to just under US$1.9 billion.
Shares of the NASDAQ Stock Market surged US$3.11, or 29.2 percent, to US$13.76, while Instinet shares fell US$0.48 to US$5.22. Instinet said in a release that investors would receive approximately US$5.44 in cash per share. British financial information company Reuters Group PLC, which owns 62 percent of Instinet, said it expects to receive US$1 billion from the deal; Reuters stock was up US$1.44 at US$49.20.
To finance the Instinet purchase, NASDAQ will take on US$955 million in new debt, to be paid within six years. Greifeld said, however, that the company will save US$100 million in synergy costs over the next two to three years, and plans to pay off the debt before it comes due.
The NYSE deal and the NASDAQ purchase put the two markets -- the 213-year-old icon versus the slick, computerized upstart -- into a head-to-head competition that will likely result in a variety of new investment products and lower transaction fees for both institutions and individual investors. Greifeld said the NYSE-Archipelago deal was not a factor in the acquisition, which was described as a long, hard auction process.
Greifeld took the opportunity to jab at the larger, older competitor -- and the human specialists who manage floor auctions on the NYSE -- in extolling the NASDAQ's all-electronic trading systems.
"We do not anoint anyone as a specialist or monopolist. It is the best of both man and machine," he said. "We certainly accept the flattery of their imitation" in adopting an electronic platform, Greifeld added.
The NYSE-Archipelago merger gives the venerable NYSE, known worldwide for its trading floor, a strong electronic trading platform that it would have taken years to otherwise develop. The combined company, NYSE Group Inc, would also make the not-for-profit NYSE a for-profit enterprise.
Analysts have said a NASDAQ-Instinet deal would help stave off increased competition from the combined NYSE Group Inc. NASDAQ itself claims a 50 percent market share in trading its own listed stocks -- though analysts say that number is around 25 percent to 30 percent -- and 15 percent volume in NYSE-listed stocks. Both ArcaEx and Instinet have about 25 percent market share each in NASDAQ stocks and a minimal share in NYSE stocks.
The NYSE has a share of more than 80 percent in its own listings, and does not trade NASDAQ stocks on the floor of the exchange. But with ArcaEx, NASDAQ's archrival now has a vested interest in not only maintaining its own listed shares, but also stealing market share from NASDAQ. The Instinet deal, in addition to improving NASDAQ's trading technology, will also shore up NASDAQ's market share in its own stocks.
Greifeld added that the NASDAQ will have a "maniacal focus" on taking additional market share in NYSE-listed stocks.
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