Nasdaq Buying Instinet Group, Setting Up E-Trading Showdown With NYSE

In a long-expected deal, the Nasdaq Stock Market on Friday said it will buy Instinet Group Inc.'s Inet electronic-trading platform for $934 million. The deal comes two days after the New York Stock Exchange disclosed plans to buy the all-electronic exchange Archipelago Holdings Inc., in a direct challenge to Nasdaq.

Instinet also will sell its institutional brokerage business to private-equity firm Silver Lake Partners for $208 million, and its Lynch, Jones & Ryan subsidiary to Bank of New York for $174 million.

Together with the NYSE-Archipelago deal, the Nasdaq-Instinet deal creates two larger pools of liquidity for trading U.S. equities. The deals signify a "win for all electronic trading," says Oswald Castillo, hedge-fund manager at The StockStalker.com, in an E-mail interview. If the NYSE allows more trading electronically "then lots of traders like myself will be attracted to trading more of their stocks," he says. Still, "it's not a slam dunk for NYSE by any means."

In acquiring Inet, Nasdaq will gain a robust, leading-edge trading platform. Electronic-trading platforms such as Inet and Archipelago compete in large part on how fast they can deliver information or complete a transaction, with the battle waged on subsecond differences. Instinet has "the leading technology on the planet, with response times of 5 milliseconds for incoming orders," Bob Greifeld, Nasdaq's president and CEO, said in a conference call.

With Instinet holding about a 24% share of trading volume in stocks not listed on the NYSE, the deal boosts Nasdaq's market share to between 60% and 65%, according to a report by Larry Tabb of The Tabb Group.

"Nasdaq's share had been eroded in recent years by electronic communications networks such as Archipelago, Brut, Island, Instinet, and TradeBook," says Bob Iati, a partner at The Tabb Group. With Archipelago going to NYSE and Inet going to Nasdaq, Bloomberg LP's TradeBook is one of the last free-standing communications networks, he notes.

With NYSE and Nasdaq once again pitted head-to-head, some observers speculate that NYSE holds the stronger hand. "NYSE has a much greater capability to trade unlisted securities than Nasdaq has to trade NYSE-listed securities," Iati says.

Not only is the NYSE gaining an industrial-strength E-trading platform with Archipelago's ArcaEx, but it's also gaining Archipelago's 22% share in unlisted trading volume, he says. Nasdaq, by contrast, already had a decent E-trading platform of its own, Iati says, and Inet's share of trading in NYSE-listed securities is insignificant.