After a tough year for stock trading, embattled electronic exchange
is diversifying into a new line of business -- currency.
The trading forum, which is reportedly in talks to
merge with rival Island, said Tuesday it was teaming up with financial powerhouse
Citibank arm to offer the anonymous execution of large currency transactions.
"Given the current market in equities, a lot of former equities players are moving out into complementary businesses," said WR Hambrecht analyst Stephen Laws. Instinet recently began offering fixed-income products to its European customers. Struggling market-maker
, meanwhile, has moved aggressively into options market making.
Citibank and Instinet's joint service, to be called Instinet FX Cross, will be operational in the fourth quarter of 2002. Initially, the FX Cross will offer executions in 12 currencies and two "crossing" sessions per day to North American clients only. The service will later be extended to European clients. Exchange rates will be set by a CitiFX benchmark.
Laws said the operation will focus on institutional traders, money managers and hedge funds looking to offset currency exposure from international investments. "These guys are more willing to wait for a match, as opposed to trading in the open market," he said.
The currency business probably won't be an important contributor to Instinet's revenue for several years, Laws said. Instinet's profits have been squeezed by declining trading volumes and a price war with rival trading exchanges.
Citigroup is committed to success in currency market-making after a previous deal with Atriax fell through, Laws said. "They've been looking to be a player in the space for a long time." J.P. Morgan Chase, Deutsche Bank and Citibank were all partners in the Atriax deal, and rank among the largest in terms of foreign exchange trading volumes, mostly trades that are completed internally.
Instinet shares were lately up 2.8% to $7.74, while Citigroup shares were rising 1.2% to $46.42. Financial stocks were higher Tuesday after Merrill Lynch
reached a settlement with New York State Attorney General Eliot Spitzer in response to allegations that its analysts misled investors to stimulate investment banking business.