Instinet Looking More Like Past Than Future - TheStreet

It wasn't too long ago that market pundits were predicting electronic trading platforms like

Instinet

(INET)

would one day rule Wall Street.

Once again, the pundits are being proven wrong.

Instinet, which electronically matches stock trades, reported Tuesday that it lost $112 million, or 34 cents a share, in the fourth quarter. For all of 2002, the company posted losses of $735 million, or $2.71 a share.

That's a stunning turnaround from 2001 -- the year

Reuters

(RTRSY)

partially spun off its so-called electronic crossing network in a much-anticipated $450 million initial public offering. In 2001, Instinet generated $144 million in profits, or net earnings of 63 cents a share.

Investors weren't showing much confidence in Instinet's future on Tuesday. In midday trading, the stock was down 26 cents, or 7%, to $3.25. Instinet shares are down more than 80% since the company's May 2001 IPO.

Shares of other electronic trading platforms were hit hard too on Tuesday. The stock of

Investment Technology Group

(ITG)

was off 57 cents, or 3.5%, to $15.37. Shares of

eSpeed

(ESPD)

were down $3, or 19%, after telling analysts it expects a weak outlook in 2003 for electronic bond trading. eSpeed's shares fell even though it posted fourth-quarter net income of $8.8 million, or 15 cents a share, compared with $7.8 million, or 14 cents a share, in the year-ago period.

Instinet, meanwhile, didn't help its cause by announcing on Monday that its president, Mark Nienstedt, had resigned after just few months on the job. Analysts saw the move as a cost-cutting effort because Instinet announced no plans to fill the position.

The main source of Instinet's problem the past year has been the growling bear market on Wall Street, which has taken a huge chunk out of trading volumes. Indeed, revenue from transaction fees in the fourth quarter fell 13% to $278 million.

Complicating matters for Instinet is that last year it had to slash prices and reduce some fees in order to compete with other electronic trading platforms for customers.

The company also posted a $20 million loss on investments, which reduced its total revenue in the fourth quarter to $267 million. Meanwhile, expenses soared 36% in the quarter to $372 million. Instinet attributed much of that increase to its September acquisition of Island ECN.

Instinet is still looking for the purchase of Island -- which had been one of its main competitors in processing trades of

Nasdaq

-listed stocks -- to start paying dividends. Company officials remain hopeful that will happen later this year, but they say much depends on the future of the stock market.

"Our business is dependent on overall trading volume," said CEO Ed Nicoll. "And in three decades in this business, it's hard to recall such a tough period."

Some on Wall Street think the tough time Instinet is having is one reason Nasdaq Stock Market officials are in no rush to announce an IPO for the Nasdaq. While Nasdaq officials insist they are still pursuing their IPO dreams, they have given no timetable for selling shares to the public.

Optimists, on the other hand, point to the strong post-IPO performance of the

Chicago Mercantile Exchange

(CME) - Get Report

, one of the world's largest markets for futures. Shares of the Merc, selling near $43, are up 23% since its late December 2002 IPO.