Instinet Cuts Prices in Bid to Capture More Volume

Instinet (INET Quote) slashed the average prices for broker-dealers trading Nasdaq securities by 60% Tuesday, as the price war for market share with rival electronic trading exchanges escalates.

Instinet first cut prices in October and then again just five weeks ago. In mid-February, the Island ECN announced that it would cut trading prices by as much as 47%. Nasdaq recently announced its own price cuts, but to be eligible, traders have to place at least 95% of their trades with the Nasdaq Stock Market, rather than using another platform or exchange.

"It's a game of leapfrog," said Glenn Schorr, an analyst at Deutsche Banc Alex. Brown. Instinet was lately falling 28 cents, or 3.4% to $7.85. The steep reductions in average rates have primarily been confined to the sell-side of transactions, said Schorr, where Instinet and its competitors pay broker-dealers rebates in an effort to boost liquidity.

Instinet increased the rebates paid to broker-dealers who sell shares through its system to 20 cents per 100 shares from 5 cents per 100 shares. On the buy-side, the company still charges broker-dealers 30 cents per 100 shares. The net cost for those customers who buy and sell an equal amount of shares is now 5 cents per 100 shares. All broker-dealers who execute at least 500,000 shares a month will qualify for the new rates.

By comparison, Island offers rebates of 11 cents per 100 shares and Nasdaq offers rebates of 10 cents per 100 shares.

Despite the magnitude of Instinet's cut, it probably won't be the end of the price war. In a research note Monday, Merrill Lynch analyst Judah Kraushaar expressed concern that Instinet's competitors have more efficient cost structures and more room to reduce prices.

"Though management is highly focused on improving market share through competitive pricing, and with new product rollouts and functionality, we believe the firm could face an uphill battle as rival ECNs are leveraging lower cost structures to aggressively compete on price," Kraushaar wrote in the note.

Separately, Credit Suisse First Boston on Monday cut its 2002 and 2003 earnings estimates for Instinet, citing tame trading volume on the Nasdaq.

Instinet had long been surrendering market share to rivals when it decided to begin dropping its prices. While the trading platform has managed to slow the loss of market share since October, its rivals are still gaining ground.

On a quarterly basis, Island and Archipelago's first-quarter volumes through February are 4% and 23%, respectively, above fourth-quarter levels, compared with Instinet's 3.5% decline over the same period, according to Kraushaar's research note.

Instinet traded 4.94 billion U.S. equity shares in February, a 9% decline from January and a 24% drop from the same month a year ago. The latest February included 19 trading days, on par with February of last year and down from January's 21 trading days. Some 79% of the stocks Instinet traded during February were Nasdaq securities. The rest were exchange-listed.

In January, Instinet handled 9.5% of the total Nasdaq share volume. Island had 10.8%, Redibook took 5.4%, Archipelago had 3.9% and Nasdaq's SOES and SuperSOES trading systems controlled 20.5%.

Instinet also set plans to increase the rebate for selling exchange-traded funds while lowering the charge for buying the securities. ETFs, which track a sector or portion of the market and trade like stocks, have become popular with investors in recent years.