Yo Chuck! One of the baddest names in big-time electronic trading is pushing into
territory, as the retail investing industry continues to evolve toward self-service.
Bowing to competitive pressures,
is targeting the savviest and most profitable e-traders for a retail brokerage it plans to launch in April. The trading arm of
, best known for its electronic order-matching system and after-hours trading network, will offer these customers direct access to the markets, cutting out middlemen such as market makers and specialists in many cases.
The service, akin to the market access that daytrading firms give their customers, will create a formidable competitor for firms chasing online brokerages' most active and lucrative customers. It will also continue the industry's evolution toward unmediated stock-trading, which some observers say offers investors the best prospects for fairer and faster executions. That stands to further squeeze the middlemen themselves.
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Targeted at high-end customers, this type of trading service could force online brokerages to offer high-end trading platforms themselves. And if the past is any indication, eventually the masses may demand the same technology.
Instinet's move is yet another effort on the part of brokers to appeal to the sophisticated, semiprofessional traders who do most of a firm's trading and therefore generate most of the firms' revenue. "A small percentage of the accounts represent a lot of the trading," says Amar Mehta, an online brokerage analyst at
CIBC World Markets
. "That's pretty much the case for all the brokers."
An established trading house that carved new ground in the early 1970s when it began matching buy and sell orders electronically for institutional investors, Instinet now handles daily volume of more than 200 million shares. With that kind of heavy trading, investors will likely find better execution prices with Instinet than with competitors, Instinet Chief Executive Doug Atkins says. For traders who trade in decent volume, that could be a big selling point.
The pricing advantage is important because if Instinet can get investors another half-point or quarter-point on a trade, it could afford to charge a premium price for each trade, rather than the $10 to $30 that many brokerages have settled on. For instance, paying $10 at a discounter to buy 10,000 shares at 20 ends up costing some $2,460 more than buying the same lot at 19 3/4 with a $50 commission, Atkins points out. By eliminating middlemen and their fees, direct trading should offer truer market prices, he says. But, he adds, no decision on pricing has been made yet.
Instinet's new product could give investors brand-name comfort as they move into direct market trading, says Russell Keene, an online brokerage analyst at boutique investment bank
Putnam Lovell de Guardiola & Thornton
. That means it could take share from the mainstream online brokers. "It really would compete with the active trader/professional trader that currently uses Schwab,
," Keene says. Putnam Lovell hasn't done underwriting for any of the firms involved.
The implications of Instinet's move won't be limited to online brokerages. The firms that process and facilitate trades could take a hit as well, analysts say. According to a Jan. 26 note from
analyst Amy Butte, Instinet's entrance into the retail market could hurt market maker
, which Butte began covering with a rare unattractive rating.
Butte and many others are focused on direct access, which typically lets investors send orders via the Internet to a brokerage and then onto an electronic trading system. Typically, online brokerages use a Web-based service that takes orders and then sends them (most often) to a market maker such as Knight. Since Instinet has its own system, market makers won't get any business unless Instinet can't fill an order. So if Instinet is able to expand its market share, that means a shrinking pie for the market makers that handle traditionally executed online trades.
One clear challenge for Instinet will be getting the message to the retail market without racking up hundreds of millions of dollars in ad bills like the online brokerages. In the past year, it's been those marketing dollars that have created the major players in the sector.
And Instinet has had concerns of its own. For one, its share of both off-hours and regular-hours trading has been dwindling: According to
, Instinet's market share slipped to 59% from 64% in the third quarter, while competitor
boosted its share by a percentage point to 24%. That share decline fueled speculation that Reuters would spin Instinet off to shareholders to protect Reuters' earnings from trading volatility.
Instinet's Atkins says the IPO decision is Reuters'. "All I want is for us to be able to continue to innovate markets and put more money in investors' pockets, and that can be done within Reuters or outside of Reuters," he says. Reuters had no comment.
Already concerned about diversification, Instinet in the past year has gotten into areas that are also at the top of many brokerages' to-do list. It's pursuing fixed-income trading and has a stake in the U.K. private stock market
. It also owns part of competing ECN
and online investment bank
. In fact, Atkins says Instinet will distribute W.R. Hambrecht IPOs to its customers, a setup similar to Schwab's recent investment in a start-up online investment bank.
Chuck might consider himself lucky it's not so easy to replicate his big, bad consumer brand name.