Reuters’ Instinet electronic marketplace subsidiary raised $464 million in its IPO.
Reuters’ ECN (electronic communication network) subsidiary Instinet floated successfully on the Nasdaq on Friday. The IPO raised over $464 million, valuing the company at around $3.5 billion. This success signals an important shift in sentiment on Nasdaq. Over the past five months, an unprecedented series of interest rate cuts have brought the federal funds rate down by 2% – improving prospects no end for those companies involved in broking and trading.
More reasonable stock valuations and falling returns on fixed income products point towards a return to equity investments for retail traders. This trend has certainly contributed to the success of Instinet’s IPO. In terms of long-term growth and prospects, Instinet has floated at just the right time. The US – despite flying low over the possibility of recession – now looks on course for a soft landing.
The signals coming out of Instinet suggest some interesting dynamics at work in the industry. Many of the largest US and European brokers have recently been buying up market making firms to strengthen their positions. This really represents a bridge to the markets themselves. With sufficient customers and liquidity, market makers would really serve no purpose.
But ECNs are a direct threat for existing retail broking firms, since they allow private investors direct access to the networks. Matching orders internally – or with other ECNs – bypasses much of the functionality of traditional retail brokerages. All Instinet needs to become a major force in this area is a customer base; IPO-funded acquisitions could obtain it one rather quickly. Instinet has already suggested that it may use some of its new funds to acquire Texas-based retail brokerage ProTrader.
The core of the industry, the access to retail consumers, is being attacked from both ends now. Brokers may have the customer relationship but exchanges have what customers really want – profit opportunities. The message that comes from Instinet suggests that brokers should beware. Here cometh the marketplace.
