Nasdaq, the world's largest electronic stock market, announced yesterday that it would buy Instinet, the last major operator of an electronic trading system still standing, for $1.9 billion.
The deal, which Nasdaq's chief executive called the "worst-kept secret on Wall Street," comes two days after the New York Stock Exchange made its surprising announcement that it would buy Archipelago, another big electronic trading system.
The two deals will ultimately determine who controls the trading of trillions of dollars of stocks every day. The transactions illustrate how much has changed recently: the Securities and Exchange Commission has rules governing markets, profits in the trading business have been pushed to virtually zero and the vast difference in how stocks are traded, either by humans or through completely automated systems, is becoming more stark. The new reality has pushed four rivals into unlikely alliances.
The NYSE's deal is a far bolder stroke, reflecting a fundamental shift from a f loorbased, not-for-profit system to a public company with greater potential for electronic trading.
With the acquisition of Archipelago, the New York exchange will have the ability to trade options and derivatives as well, and it will have two different platforms to trade stocks: one for Nasdaq and NYSE stocks, and another that is a hybrid (both human floor traders and an automated system) for trading just stocks listed on the New York exchange.
"All of the sudden, Nasdaq is not dealing with a patsy, kickme- while-I'm-down kind of competitor," said Seth Merrin, the chief executive of Liquidnet, an electronic market for large orders. "Now they have the makings of a truly competitive public entity which will be fully electronic with the functionality that Nasdaq-Inet will have to offer." Nasdaq, with its purchase of Instinet, and its electronic trading unit, Inet, becomes the technology leader and will dominate the trading of Nasdaq stocks. As the New York Stock Exchange works to integrate two cultures and technologies, Nasdaq will have an opportunity to gain volume and listings at the expense of its traditional rival.
As of the end of 2004, Nasdaq listed 3,271 companies with a total market value of $3.7 trillion; 2,760 companies with a market value of $20 trillion were listed on the New York exchange.
Under the deal announced yesterday, Nasdaq will buy Instinet, which is 62 percent owned by Reuters Group, for $1.9 billion. Nasdaq will simultaneously sell Instinet's brokerage business to Silver Lake Partners, a private equity firm, for $208 million and sell Lynch, Ryan & Jones, a smaller trading service business, to Bank of New York for $174 million.
Shares of Instinet fell 9 percent, or 51 cents, to $5.19 after the announcement of the deal.
Shares of Nasdaq surged 26 percent, or $2.78, to $13.43.