Electronic trading pioneer Instinet Group and the Philadelphia Stock Exchange are in talks aimed at a strategic alliance that could have a major impact on the structure of U.S. equity markets and the escalating competition between electronic and floor-based exchanges. The discussions have advanced beyond preliminaries but have yet to progress to the point where a deal is imminent. “If I told you we haven’t had conversations about specific things, I’d be lying,” says PHLX chairman Sandy Frucher. Instinet CEO Ed Nicoll referred a phone call to a spokesman who declined to comment.
Among other options, Instinet apparently would be willing to consider an outright acquisition of the PHLX, one of many regional exchanges that have lost most of their equity business over the years to the New York Stock Exchange and Nasdaq. But such a deal likely would be nixed by the Securities and Exchange Commission, which in recent years has made it known that it will not permit a brokerage firm to have more than a 40 percent ownership stake in, or 20 percent voting control of, a securities exchange. “They can’t buy us,” says Frucher. “It would have to be a strategic alliance.”
Although Frucher won’t elaborate on the discussions, others familiar with the matter say that any Instinet-PHLX deal is likely to resemble the arrangement reached in 2000 between Archipelago, Instinet’s main competitor in the business of electronically matching stock trades, and the San Franciscobased Pacific Exchange. In that landmark deal Archipelago paid an estimated $90 million for a minority stake in the PCX and shuttered its stock-trading floor. As an exchange rather than an electronic communications network, Archipelago saved millions of dollars a year in trade-clearing fees and gained the ability to compete more aggressively for trades in NYSE-listed shares.
Instinet could derive similar benefits from a link with the PHLX, which in turn could reinvigorate its long-moribund equity business with Instinet’s technology. Such an alliance would cost Instinet much less than the $90 million Archipelago paid for its stake in the PCX, informed sources say.
The PHLX -- the nation’s oldest stock exchange -- is talking with other potential partners, according to Frucher. And Instinet could seek an alliance with another regional exchange, such as the Boston or Chicago stock exchange. Unlike those markets, the PHLX converted from a membership organization to a stock company late last year and has been far more aggressive about pursuing strategic alliances and mergers.
Instinet itself is up for sale (Institutional Investor, January 2004), an open secret that parent company Reuters Group finally confirmed in July when it said it would entertain bids. Sources say, however, that few buyers have come forward and that a deal with the PHLX might further complicate that process.
