Electronic communications networks merge

Computerworld - Last week's announcement that Instinet Group Inc. will buy competitor The Island ECN Inc. gives Nasdaq Stock Market Inc. another potential stock exchange competitor while further complicating its uphill battle to woo customers to its forthcoming SuperMontage electronic-trading system.

Instinet's $508 million, all-stock purchase of New York-based Island will create an electronic communications network (ECN) that represents about 22% of Nasdaq's order flow, which "does take some of the thunder away from Nasdaq," said Damon Kovelsky, an analyst at Meridien Research Inc. in Newton, Mass.

Island, which had been pursuing exchange status on its own, said it will continue to do so jointly with Instinet. The move, analysts said, will likely force the U.S. Securities and Exchange Commission to redefine what an exchange is, something it has shown reluctance to do in the past.

Island Chairman Edward Nicoll and Instinet CEO Mark Nienstedt said during a conference call last week that they expect the buyout to save the combined firms millions of dollars each year through synergies in technology, including the use of a single trade-clearing system after consolidating onto New York-based Instinet's platform.

"We've got some real benefits in combining these two companies," Nienstedt said. "On the cost side, we do see synergies that we conservatively estimated to be at a $25 million a year [in 2003] in areas of clearing and combining some of the facilities and shared corporate services and technology. Over the longer term, we think there will be opportunities for more of those" cost savings.

A spokeswoman for Instinet declined to comment on how the merger may affect technical staffing at the two firms.

Nicoll said that the companies will continue to be run separately and "continue to set our pricing policies separately" until the merger is completed. That process should take about three months, according to an Instinet spokesman.

"The technological integration will follow a step behind" the pooling of liquidity between the two firms before connecting the trade-matching engine and then eventually migrating toward one integrated technology platform, said Matthew Andresen, president and CEO of Island. "Remember, these systems are very different. And we think they're complementary," he said.

For example, Instinet's Smart Router technology already offers traders access to other liquidity markets, including Island's.

An Instinet spokeswoman was unable to comment on specifics regarding the integration of back-office systems between the two firms.

Uncertain Future

Island had previously agreed to participate in Nasdaq's SuperMontage, and it wasn't immediately clear whether that plan will be shelved. Nicoll said Instinet will decide whether to use SuperMontage when it's rolled out next month.

The SuperMontage system will give traders many of the features that they can get only through ECNs today, such as the ability to display their limit orders anonymously, along with the ability for brokers to separate their own trades from those they execute for customers.