Instinet Mulls $500m Merger With Island Ecn

Instinet, the online share dealing firm majority owned by Reuters, is said to be in $500m (£343m) talks with rival Island ECN to create a company that could present Nasdaq with a competitive challenge.

The deal between the two largest online brokers would also return Instinet to the top spot in the market. The once-dominant company has been jostling with Island for market leadership with both accounting for about 11% of the shares traded on Nasdaq.

Shares in Instinet climbed almost 13% to $7.88 on talk of a deal, giving the company a valuation of close to $2bn. The shares have lost about 45% of their value since the business was floated on Nasdaq at $14.50 a year ago.

"I think this is really good news," said Michael Nathanson, an analyst with New York-based Sanford C Bernstein & Co. "It gives Instinet a low-cost provider of liquidity and it takes out a competitor."

Island's trading technology also has the edge over Instinet's older systems, he added. Spokesmen for both companies declined to comment.

Instinet has suffered with the decline in retail day traders, the phenomenon of the dotcomboom era. In the past year it has cut 600 staff, about 15% of the workforce.

Instinet also said yesterday that it would pay former chief executive Doug Atkin, who stepped down in April after 18 years at the company, about $4.6m over the next two years. He was replaced on an interim basis by Mark Nienstedt, Instinet's finance director. Kenneth Marshall, chief operating officer, left the company at the same time as Mr Atkin. Analysts at the time suspected that the management shake-up might presage a takeover approach for the company.

Analysts have long been expecting consolidation in the electronic trading market. The business has seen intense competition to win traders in what has become a two-year long bear market, and price cuts have eaten away at margins. Online brokers, which match "buy" and "sell" stock orders electronically, handle about one-third of all trading on Nasdaq.

Nasdaq is attempting to win back market share from the electronic traders with a new trading system called SuperMontage, due to be introduced this summer. Online traders have yet to make any significant impact on the New York Stock Exchange.

Island has been rapidly gaining market share from Instinet because of lower user fees as well as better technology.