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Merging with Island and shaking up management have revived a faltering Instinet. But it must still cut costs and face down Nasdaq's SuperMontage. By Justin Schack
Sam Shapiro had a problem. It was a spring afternoon in 1999, Nasdaq stocks were surging, and his Instinet terminal was on the fritz. He called customer service. "They said: 'Your terminal's down? We'll send you a new one right away, recalls sapiro. I asked them what a should do with the old one, and they said: 'Keep it. Throw it away. We really don't care.'"
Shapiro, an Atlanta money manager, was thrilled at how quickly he got his new machine. In those heady, bull market days, he relied heavily on Instinet to buy and sell stocks. Its electronic system enabled him to match trades directly with other institutional investors, avoiding the high commissions of mainstream broker, who might have divulged his strategy to other clients to boot. But trashing terminals? Shapiro, whose Shapiro Capital Management Co. has $1 billion under management, didn't think much of the way the company ran its business. "They used to throw away money," he says. "I don't think they had any cost controls at all."
Shapiro had that right. Instinet's lack of discipline, in fact, cost it dearly. Even as the Internet and the technology stock mania led to a surge in the kind of electronic trading that Instinet had pioneered three decades earlier, the company nearly came unraveled. Costs spiraled and upstart rivals stole large swaths of its market share, even as Instinet Group CEO Douglas Atkin set out on an expensive and ill-conceived expansion into ancillary markets such as fixed-income trading and retail brokerage.
Like the lavish headquarters it fashioned in the Times Square skyscraper occupied by Reuters Group, its corporate parent since 1987, some of Instinet's spending was pure waste. But the company also had to fight off a host of more nimble start-ups, armed with newer technology, that exploited governmentmandated reforms in the Nasdaq Stock Market. And it was losing the fight. By February 2000 Instinet had been surpassed as the largest electronic communications network by Island ECN, which handled 10 percent of Nasdaq trades. Island's share had doubled by the start of 2002, while Instinet fell behind...