Nasdaq buys electronic share trader for $2.5bn

NEW YORK - Nasdaq Stock Market has agreed to buy Instinet Group for US$1.88 billion ($2.5 billion) in cash, combining the two largest electronic markets for US equities to form a stronger competitor to the expanding New York Stock Exchange.

Nasdaq will sell Instinet's brokerage arm to Silver Lake Partners, a private-equity firm, for US$207.5 million. It will also sell Instinet's Lynch, Jones & Ryan subsidiary to Bank of New York Co for US$174 million. Reuters Group owns 62 per cent of Instinet.

The stakes for Nasdaq, already high as it gradually lost business to newer electronic markets such as Instinet, escalated last week when the NYSE said it was taking over Archipelago Holdings Inc.

The NYSE is the world's largest equity market, with total capitalisation of about US$13.7 trillion. Nasdaq's capitalisation was US$3.7 trillion at year-end.

"They're trying to buy market share," said Jamie Selway, a former Nasdaq researcher who now runs White Cap Trading, a New York brokerage for institutional investors.

"They have to do it. Survival."

Shares of Nasdaq, which plans to keep Instinet's electronic-trading unit, INET ECN, surged US$2.78 on Friday, or 26 per cent, to US$13.43, the biggest gain since the company went public in July 2002.

Instinet fell 51USc, or 9 per cent, to US$5.19 after investors had speculated it would fetch a higher price.

Chicago-based Archipelago, the third-largest electronic market for US stocks, had a 23.5 per cent share of trading in Nasdaq-listed stocks in the first quarter. Instinet had 25 per cent.

Both electronic exchanges and electronic trading systems known as ECNs can trade Nasdaq stocks.

"The notion of the New York Stock Exchange having 25 per cent of [Nasdaq's] share must scare them to death," Selway said.

Archipelago shares fell 20USc to US$29.76, after surging 60 per cent.

Nasdaq CEO Robert Greifeld said Nasdaq was "maniacal" about pursuing its business plan, which included increasing market share in trading of Nasdaq and NYSE-listed shares. With the INET combination, he said, Nasdaq's share of trading of its own listed shares would be about 80 per cent - equal to the NYSE's dominance of Big Board stocks.

Reuters said it expected to receive about US$1 billion in cash after tax and transaction fees, and expected to return "an amount equivalent" to that to shareholders.

Reuters put Instinet on the block five months ago, saying the business wasn't central to its strategy.

Instinet reported net income of US$53.7 million for 2004.

- BLOOMBERG