NEW YORK, April 22 -- The brewing stock market war heated up on Friday as the Nasdaq Stock Market Inc. announced it would buy Instinet Group Inc.'s electronic trading network for $934.5 million.
The announcement, which had been widely anticipated, came two days after the New York Stock Exchange Inc., Nasdaq's biggest rival, announced it would merge with electronic trading firm Archipelago Holdings Inc. and become a for-profit, publicly traded company.
The pair of high-profile deals sets up what could be a long and brutal battle for dominance in matching stock market buyers and sellers. And it reduces what had been a highly splintered marketplace to just two dominant competitors.
While the deals are of enormous significance to the stock-trading industry, in which different marketplaces compete for listings and orders and to provide market data, it remains to be seen exactly what the two mergers will mean for individual investors.
Some analysts and federal regulators have said the deals should benefit consumers by encouraging greater competition between the NYSE and Nasdaq to produce faster, cheaper stock transactions. Federal securities and antitrust regulators will examine both deals to ensure they will not harm consumers.
At a news conference at Nasdaq's Market Site location in Times Square on Friday, Nasdaq chief executive Robert Greifeld said: "This transaction will position us to offer investors increased choice in the trading of stocks listed on other markets, and it will also provide increased liquidity and time priority for stocks listed on Nasdaq."
Greifeld said the deal, which has been in the works for months, was not a response to the NYSE's deal with Archipelago. "We have truly bunkered down to get this transaction done over the last three weeks and the [NYSE deal] really had no bearing on the negotiations that were involved in our transaction. . . . Our transaction was happening regardless of what was happening across the street," he said.
Under terms of the deal, valued at a total of about $1.9 billion, Nasdaq agreed to buy all of Instinet and to immediately sell Instinet's institutional brokerage arm to private equity firm Silver Lake Partners and another subsidiary to the Bank of New York.
Acquiring Instinet, currently majority-owned by news and financial data provider Reuters Group, will give Nasdaq access to leading electronic-trading technology and will increase the volume of orders it handles. In recent years, Nasdaq had been losing market share in its own listed stocks to electronic traders such as Instinet, which currently executes about 25 percent of the orders in Nasdaq-listed stocks.
In the first quarter of this year, Archipelago said it executed about 23.5 percent of the total trades in Nasdaq stocks. Analysts said the migration of nearly a quarter of the trades in Nasdaq stocks to the NYSE made Nasdaq's Instinet deal a necessity.
"Nasdaq is on the defensive," said Jack A. Ablin, chief investment officer at Harris Trust and Savings Bank. "The NYSE's move to buy Archipelago was a shot across the bow, no doubt about that. Nasdaq had to buy more order flow."
As stock trading commissions have decreased, the business of matching buyers and sellers has become one in which having large daily volume is critical to survival. In addition to direct revenue, large trading volume makes the data that stock markets sell to investors more valuable.
Yakov Amihud, a professor at New York University's Stern School of Business who follows stock exchanges, said the acquisition of Instinet would help Nasdaq consolidate trading in its listed securities. Currently, Nasdaq trades are fragmented across several different electronic networks within Nasdaq.
"The merger will help consolidate trading and reduce this fragmentation, and thus improve liquidity on stocks that were previously traded on both Nasdaq's system and Instinet," Amihud said in an e-mail.
"Probably, Instinet's platform will be dominant in the post-merger Nasdaq," Amihud said. "I think Nasdaq is doing the right thing, and I expect that the combination will attract trading from other trading venues, and that the market share after the merger will exceed the combined market share of Nasdaq and Instinet now."
Amihud said he thought both newly created trading giants could survive, with each handling the large majority of trades in a certain universe of stocks and competing heavily for new listings.
