Enron Mail

Subject:I know you were very interested in ecn's at one point....
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

"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'

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

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.