On Monday, Reuters announced the sale of Bridge Trading, a soft-dollar execution broker to Instinet Group, its electronic brokerage subsidiary for $21 million in Instinet stock.
The deal could move Reuters a step closer to a potential divestiture of Instinet, which has been a rumor circulating the markets for several months.
"Reuters is divesting itself of the assets that don't fit into its new restructuring strategy," says Jodi Burns, senior analyst at Celent Communications. Reuters bought Bridge Trading in 2001 when it acquired the assets of Bridge Information Systems.
There has been ongoing market speculation that Reuters, which owns nearly 62 percent of Instinet, plans on divesting the brokerage business which houses INET, the electronic communications network, and Instinet, the global electronic securities broker. In November, Reuters acknowledged that it would consider strategic options such as a potential Instinet sale, merger or other business combination or corporate transaction.
The acquisition of St. Louis-based Bridge Trading could increase Instinet's market share in exchange-listed shares. It also could give Instinet access to Bridge's 500 institutional customers, who can route orders to Instinet's Smart Router and use its technology. Additionally, Instinet will gain an exclusive in providing the Bridge workstation to its own 1,000 buy-side customers.
"There's exclusivity with Instinet, but we're giving the clients more choices to pay for their Bridge machines," says Mike Plunkett, president, North America, Instinet LLC. He explains that Bridge Trading's institutional accounts will have the opportunity to trade through Newport, Instinet's global portfolio trading system, and Portal, its single-stock trading front end and its Smart Router to reach different liquidity pools. He notes that "Bridge trades about eight million shares a day, six million of which are listed shares that will actually go through our Smart Router."
As a result of the deal, buy-side customers will pay for the Bridge workstation, which will be renamed the Reuters workstation in the future, with soft-commission dollars by sending order flow to Instinet. The Bridge workstation provides technical charting, back testing of trading signals, as well as fundamental research to the buy-side trader or portfolio manager.
Because there are many synergies between the two agency-brokerage businesses, the transfer of Bridge Trading assets could boost the price that a divestiture of Instinet is going to command, notes Celent's Burns. "What is smart about shifting the assets of Reuters into Instinet is that Instinet is going to command a very nice purchase price, more than if Reuters sold Bridge Trading separately. It's going to be highly valued especially if there is a bidding war from all the exchanges that have expressed interest in it," says Burns.
Published reports have speculated that the price tag will be in the $2 billion range for the combined entity. A number of exchanges, including Archipelago, the New York Stock Exchange and Chicago Mercantile Exchange, have been mentioned as potential suitors for INET ATS. In addition, Knight Trading and Ameritrade have emerged as potential contenders for acquiring the Instinet brokerage arm, notes Burns.
While "the electronic brokerage operates a lot of different interesting crosses, the ECN is the hotter property of the two," says Burns. Still, she expects Reuters will sell the whole Instinet business, and if the buyer wants the ECN piece, it will sell off the brokerage arm, or vice versa.
Instinet's Plunkett did not comment on Reuter's plans or the market rumors, but did say, "In the end, we look at this deal independently of all that. It makes sense for our model. It brings more volume to our platform and gives our institutional clients more of a chance of trading with each other." Plunkett says he hopes the deal will be finalized in about six weeks or so. Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio