Nasdaq to Buy Instinet's Trading Network

The Nasdaq Stock Market Inc. (NDAQ) is purchasing Instinet Group Inc.'s (INGP) electronic trading network for $934.5 million, a move designed to improve Nasdaq's position as competition grows among the world's stock markets.

Instinet's broker-dealer arm will be sold to a private equity group, Silver Lake Partners (search), for $207.5 million, while another Instinet subsidiary, which manages commission rebates, will go to the Bank of New York for $174 million. The three transactions are all-cash deals totaling just under $1.9 billion.

The long-rumored announcement came two days after the New York Stock Exchange said it would merge with Archipelago Holdings Inc. (AX), operator of the ArcaEx electronic trading market, in a move to boost the NYSE's electronic trading offerings.

"This transaction will allow Nasdaq to compete more effectively with other U.S. and international market centers by making our technological platform more competitive, which will result in greater cost effeciiences and improved quality of execution in our market," Bob Greifeld, Nasdaq's chief executive officer, said in a statement.

Shares of Instinet, majority owned by British financial information company Reuters Group PLC (RTRSY), rose 14 cents to $5.84 on the news, while shares of Nasdaq climbed $1.55, or 14.6 percent, to $12.20. Both stocks, which are traded on the Nasdaq, were halted within two minutes of each other due to pending news about the companies.

The NYSE deal and the Nasdaq purchase put the two markets — the 213-year-old icon versus the slick, computerized upstart — into a head-to-head competition that will likely result in a variety of new investment products and lower transaction fees for both institutions and individual investors.

The NYSE-Archipelago merger gives the venerable NYSE known worldwide for its trading floor, a strong electronic trading platform that it would have taken years to otherwise develop. The combined company, NYSE Group Inc., would also make the not-for-profit NYSE a for-profit enterprise.

Analysts have said a Nasdaq-Instinet deal would help stave off increased competition from the combined NYSE Group Inc. Nasdaq itself claims 50 percent market share in trading its own listed stocks — though analysts say that number is around 25 to 30 percent — and 15 percent volume in NYSE-listed stocks. Both ArcaEx and Instinet have about 25 percent market share each in Nasdaq stocks and a minimal share in NYSE stocks.

The NYSE has more than 80 percent share in its own listings, and does not trade Nasdaq stocks on the floor of the exchange, but with ArcaEx, Nasdaq's archrival now has a vested interest in not only maintaining its own listed shares, but also stealing market share from Nasdaq. An Instinet deal would be needed shore up Nasdaq's market share in its own stocks.

Instinet's technology would also give Nasdaq an incremental increase in its own trading technologies at a time when the NYSE-Archipelago merger gives its chief rival a huge leap forward into direct competition.

Nasdaq will issue $750 million in six-year corporate bonds and another $205 million in convertible notes to cover the costs of the deal. Silver Lake Partners and buyout firm Hellman & Friedman LLC, Nasdaq's largest shareholder, will receive warrants to purchase additional shares of Nasdaq.