Instinet, the global-agency-brokerage firm best known for its ECN, has been extremely busy over the last 12 months. Most notably, on June 10, Instinet signed a pact to merge with its largest ECN rival, Island (for more analysis of the merger, see p. 24). Recently, WS&T Senior Editor Robert Sales sat down with Jean-Marc Bouhelier, Instinet's chief operating officer, to discuss the broker's foreign exchange and equities strategies, as well as its decision to pull out of the fixed-income business.
WS&T: In partnership with Citibank N.A., Instinet recently released a new foreign-exchange trading network, dubbed Instinet FX Cross. Can you provide me with some details about that network and fill me in on the role that Citibank is playing?
Bouhelier: What we're doing is using Instinet knowledge, in terms of running crossing technology and running crossing-product offerings, combined with Citibank's knowledge of running an FX operation. And we're really going to (target) institutional customers, who have pretty significant requirements to cover their FX exposure, specifically when they (trade) assets in different currencies. And we're trying to deliver to them ... the same kind of services we're delivering on equities, which is full anonymity and the ability to actually find someone on the other side of the trade.
So the objective of the product is really to provide institutional customers with the ability to trade FX, and cover their FX exposure and keep anonymity. We're working with Citibank ... (a firm that) will probably give them a better price than the one they are getting today.
WS&T: Do you view Instinet FX Cross to be a competitor to any of the multi-bank FX portals that exist today, including such consortiums as FXall and State Street's FX Connect?
Bouhelier: I think the difference with our product is that our product actually provides the customer with full anonymity. I think that with most of the other products out there, you actually have to request a quote (from the portal) and then get a quote, which actually forces you to share information about what you're trying to achieve. With our product, you are going to be submitting your (quote) requests to a crossing network ... and at the end of the day, you will either get a fill or not get a fill. And we think that that will actually create less market impact than some of the current products.
WS&T: On the equities side, Instinet obviously runs one of the largest ECNs. This summer, Nasdaq plans to launch a new order-routing and execution network which could potentially become a very large ECN competitor. What kind of impact do you think Nasdaq's SuperMontage is going to have on the OTC landscape and on ECNs in particular?
Bouhelier: At this point in time, we're really (taking) a two-pronged strategy. One (strategy) is that, as a global-agency broker, we're servicing customer orders and we will expose those orders to SuperMontage in the same way that we expose them to Euronext and the London Stock Exchange and other ECNs in the U.S. The second part of our strategy is that, in running one of the liquidity pools, we see SuperMontage as somewhat of a competitor. In that respect, we expect we will have the ability to compete, and (we believe that) SuperMontage will certainly create more innovation in the market.
WS&T: When you talk about SuperMontage as a competitor to ECNs, you're talking about the transaction engine component of Nasdaq's network?
WS&T: So, as an ECN, how do you differentiate your transaction engine from the execution capabilities that will be offered by SuperMontage?
Bouhelier: We are not ready to discuss that yet.
WS&T: Are you happy with where Instinet stands in the overall ECN market today?
Bouhelier: If you look at the last 12 months, our market share went down, but came right back up. I think for the month of May, I would guess that our market share is going to be somewhere between 13 and 14 percent, which is pretty much back to the level where it used to be a year ago ...
On the buy side, what we've done is split our customers into three groups: active money managers ... quantitative-investment managers ... and hedge funds ... What we've done for these customers is really three or four things. Number one is the same (thing) we did for (market makers), making our (ECN) available through whatever (front end) they need. We're making Instinet available to them in a more transparent manner, so that they get more integrated into their own desktop and they get more straight-through processing. That's something that (institutions) worry about, because they normally manage a very large number of funds, and being able to be efficient when they trade for those funds and allocate trades for those funds is very important.
The next thing we did is we said a lot of (institutional customers) still expect us to deliver our front end. So we've actually made two investments. One is that when we purchased (the direct-access broker) ProTrader, we inherited a new front end, which we call the Trading Portal. That really gives the customer the ability to trade single stocks, in a very efficient manner, across all liquidity pools. That front end is being rolled out to our customers. We probably have about 50-plus customers (using) it at this point in time.
WS&T: Is the Trading Portal a blend of ProTrader and Instinet technology, or is it strictly a front end you inherited from ProTrader?
Bouhelier: It's a blend of ProTrader's front-end technology with some of Instinet's back-end technology. We took the ProTrader front end, added some specific institutional functionality, and also added our smart router on the back end.
WS&T: So this is the front end that many of your institutional clients are now using?
Bouhelier: Yes, (especially) firms that are trying to trade single stocks. When I move to firms that are trying to trade using quantitative strategies on a global basis ... we have a (front-end) product that we built ourselves, called Newport. It's a global-agency, rules-based trading engine. What it does is it allows you to create trading strategies on a global basis ... That product has actually been used by our traders since last November on their desk. We have people who work orders for customers, who are using that product. The product has also been in beta with customers over the last three months. We have six customers today who are using Newport. And we will the roll out the product for probably between 50 and 60 customers by the end of the year.
WS&T: A short while ago, Instinet made the decision to shut down its fixed-income business. Can you tell me the thought-process that went into that decision?
Bouhelier: I think what happened is very simple: it takes forever to build a liquidity business ... And we, as an organization, decided at this point in time, we did not think that business would sort of grow significantly in the next two years. We thought that actually asking our shareholders to (invest) another $40 million a year for the next two years into a venture that was not necessarily going to provide the kind of return we were looking for was probably the wrong thing to do ... Like every company, we have a limited number of assets and we have (only) so much we can spend every year. And if we're going to spend ($40 million) a year, we would rather spend it on things that can actually provide a direct return. We (also) felt that there were enough changes to our core business ... that we actually did not need to go into supporting a venture which would have probably taken another three to five years to make a profit.
WS&T: So what do you think of the future of the electronic bond-trading market?
Bouhelier: It's an overcrowded space. That was one of the reasons we decided that it was not worth it for us to continue that venture. I was personally much keener to put money into our new front end, our new products, and to expand internationally.