Subject: I know you were very interested in ecn's at one point....
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Date: Sun, 20 May 2001 05:24:00 -0700 (PDT)

Instinet IPO Soars On Debut 
Mark Lewis, Forbes.com, 05.18.01, 1:30 PM ET 

NEW YORK - Any successful initial public offering is good news for Wall 
Street these days, but Instinet's debut was especially auspicious--not just 
for the moribund IPO market but for the electronic networks that are supposed 
to usher investors into the digital future. 

Instinet (nasdaq: INET - news - people) is Wall Street's oldest and largest 
electronic communications network (ECN), of the sort that matches buyers and 
sellers directly rather than forcing them to go through an intermediary. 
Instinet raised $464 million when it priced above its expected range at 
$14.50 per share. The stock opened this morning at $17 and was up 30%, to 
$18.19, in midday trading. 

That performance was a vindication for Instinet's corporate parent, Reuters 
Group (nasdaq: RTRSY - news - people), the London-based media and financial 
services giant, which retains 86% of the newly public ECN. Reuters had been 
criticized for taking Instinet public during a weak IPO market. 

[Full disclosure: The author of this piece is a former Reuters reporter, and 
Reuters' venture capital Greenhouse Fund is an investor in Forbes.com.] 

Since Reuters acquired Instinet in 1987, it and the other ECNs have evolved 
into a major threat to the established stock exchanges. Instinet's successful 
IPO could prompt similar moves by such rivals as Island and Archipelago. And 
it also bodes well for Nasdaq's plan to take itself public sometime next 
year. 

"The Instinet IPO further legitimizes electronic trading for the broad 
investment community," said TowerGroup analyst Robert Iati in a recent 
interview. TowerGroup is a research firm that studies the impact of 
technology on the financial services industry. 

When the Instinet IPO first was discussed several years ago, some observers 
expected it to establish a market valuation that would exceed the worth of 
Reuters itself. Those were the heady days of the Internet boom, when the new 
online brokerages, investment banks and ECNs seemed destined to triumph over 
Wall Street's old-fashioned ways. 

But the traditional broker-dealers, banks and stock exchanges have been 
adapting to the digital challenge, and, meanwhile, the stock market's swoon 
cut into online trading volumes. So nowadays, expectations for the ECNs are 
less exuberant. Instinet's IPO-established valuation of $3.5 billion is 
relatively modest, given that the parent company's current market cap is 
around $20 billion and that Instinet contributes about one-fifth of Reuters' 
revenues. 

Reuters has pulled back from plans to turn Instinet into a more 
retail-oriented operation. But the ECN's wholesale trading volumes remain 
robust. Instinet last year took in revenue of $1.2 billion and posted a 
divisional profit of $234 million. Reuters intends to maintain majority 
control of Instinet, which will be housed in the flashy new Reuters Building 
at Times Square. 

Now that it is public, Instinet can use its stock as currency to acquire 
other ECNs. Instinet already owns a stake in Archipelago, the Chicago-based 
ECN whose backers include Goldman Sachs (nyse: GS - news - people), Merrill 
Lynch (nyse: MER - news - people) and E*Trade Group (nyse: ET - news - people
). Another potential consolidation play is Island, a New York-based ECN 
backed by several private equity firms and by online brokerage Datek Online 
Holdings. 

Apart from acquisitions, Instinet also can use some of its IPO proceeds to 
continue upgrading its technology--a pressing need for all ECNs, which must 
remain competitive as the Nasdaq and the New York Stock Exchange become ever 
more adept at the electronic trading game. 

Finally, being a public company has a symbolic value for Instinet. This IPO 
sets a precedent by establishing an ECN as a high-profile player on Wall 
Street. That will boost the Instinet brand--and those of its rivals. This is 
the first ECN to go public, but it won't be the last.