Just a year ago, the individual investor was hot, online brokerages were hotter and the electronic trading systems that processed orders quickly were, well, sizzling.

But now the market's decline is forcing individual investors to cut back, making online brokerages and electronic trading systems much less appealing. Meantime, old-fashioned brokers and the

New York Stock Exchange

are back in demand.

Instinet

figures it falls into both camps, making it popular regardless of the climate. After all, it is 30 years old and focuses on institutional investors, but at the same time it's an electronic trading system and is starting an online broker for consumers. The problem is that it's also facing increasing competition from each side.

Instinet parent

Reuters

(RTRSY)

recently made official plans to sell a bit of Instinet in an initial public offering, showing little regard for the shaky stock market or the deadly quiet new issue market. The deal is dependent on market conditions, of course, but is expected in the first half of next year.

Consolidation

If Instinet pulls it off, the IPO could set the electronic trading industry up for consolidation. For one thing, it would be the first publicly traded electronic communications network (an ECN, or type of trading system), giving it stock to use in making acquisitions, says a Reuters spokesman. It also would allow Instinet to add a stock component to its pay packages and could increase shareholder value for Reuters by valuing Instinet separately. In addition to running a trading system, Instinet acts as a broker-dealer in the U.S., Europe and Asia, and provides research and nonelectronic trading services primarily for institutions.

Before its IPO, though, Instinet has to make it through what may be a few difficult months with the same shiny finish it has now.

The stock market has been in a decline, pushing out individual investors and dragging down earnings among retail-oriented trading firms. That may not seem to matter for Instinet because it largely trades institutional orders, but this fall the company aims to launch an online brokerage that will target retail investors. And as the recent round of quarterly results from online brokers like

Ameritrade

(AMTD) - Get Report

and

E*Trade

(EGRP)

shows, it's much tougher to make money off retail trading in a down market.

Then there's the fact that the big Wall Street overhaul everyone was waiting for -- the one in which the NYSE was going to replace traders with machines because of increasingly popular electronic trading -- hasn't happened. In fact, the upstarts have stolen little business from the

Big Board

. But they have pushed the NYSE into electronic trading. While maintaining its trading floor, the NYSE will launch automatic executions next year.

Too Much Hype

Even the trading systems -- there are about a dozen out there -- know that the revelry about the sector was a bit overdone.

Just as with Internet stocks, "a lot of that was hype," says Larry Leibowitz, CEO of

RediBook

, an ECN owned by a consortium that includes

TheStreet Recommends

Spear Leeds & Kellogg

,

Charles Schwab

(SCH)

and

TD Waterhouse

(TWE)

.

RediBook, a fast-growing ECN, still believes the upstarts will give Instinet tough competition. While it and other alternative trading systems still aer far from having enough orders to force the market to pay attention, the battle isn't over. "I think Instinet is losing market share to us and other guys," says Leibowitz.

According to

Nasdaq

, Instinet is about twice as large in terms of shares traded than its next largest competitor,

Datek Online

unit

Island

, and is more than four times larger than the next largest system: RediBook.

More Competition

Instinet is also facing competition from other alternative trading systems that are aimed at the institutional markets. These systems use algorithms to help customers execute large trades of 100,000 shares without moving the market. One such system,

Optimark

, recently suspended its deal with the Nasdaq and

Pacific Stock Exchange

. But there are others with new technology.

Primex Trading

, for instance, run by Glen Shipway, formerly of Nasdaq parent the

National Association of Securities Dealers

, expects by March to launch its large block-trading system with Nasdaq, even if electronic trading cools off.

"Irrespective of the electronic environment, whether it be a system like ours or the execution system of the market makers and broker dealers, it's going to be ever more that you can't deal with these kinds of volume. It has to become electronic," says Shipway. In fact, the less bubbly the market, the more demand for trading systems, he says. "When there's a lot of froth in the market, it's probably a little easier to get big-sized trades done."

It remains to be seen if Instinet is an IPO that can get done, without the froth.