The future independence of agency broker Instinet is open to question, following the unification of its management with that of parent broker Nomura’s electronic execution division.
Anthony Abenante, co-CEO of Instinet with Fumiki Kondo, has been appointed joint head of Nomura innovative electronic execution, with Emad Morrar, global head of product strategy and principal investments at Nomura.
Abenante will take on his new responsibilities in addition to his existing role, which he has held since June 2007, having been a managing director at Nomura since joining the firm in 2003. Previously, Abenante had worked at agency broker and technology provider ITG for almost ten years.
The Japanese headquartered investment bank currently operates two equity brokerages, both acquired, which has left it in the position of running competing businesses.
The electronic brokerage business of Instinet was bought by Nomura for US$1.2 billion in 2006 from private equity house Silver Lake, which had itself bought the broker for just US$208 million the year before. The price hike was justified at the time by the high equity trading volumes.
In November 2008, Nomura also bought the operations of Lehman Brothers in Europe for an undisclosed sum and those in Asia for US$225 million, following the US broker's collapse, which significantly boosted Nomura's ex-Japan equities businesses.
In an internal memo, Abenante said, “The ultimate goal is to better position the Nomura Group as a whole to deliver successful and innovative client solutions.”
Although he noted that Nomura values the “agency-only offering and … ability to quickly create and deploy innovative solutions” that Instinet offers, he went on to say that Instinet's offering will now “include innovative solutions developed by our counterparts at Nomura”.
Observers have said that joint management could be the start of the integration of Instinet into the larger brokerage, following some challenging years for the business.
Since its acquisition by Nomura, Instinet has faced a turbulent market in which volumes first fell dramatically before a revival in which investment banks have rapidly rebuilt their equity franchises. In 2008, monthly turnover in pan-European equity trading fell from €1.4 trillion in January to €520 billion in December, according to data provider Thomson Reuters. Volumes began to recover from February 2009 but were still only around €700-800 billion in the latter half of 2010, with a spike of €1.108 trillion in May 2010 on the back of the Greek debt crisis. Asian and North American equity trading volumes have followed broadly similar patterns.
The fall in volumes since the pre-crisis highs have put particular pressure on agency brokers that do not have any proprietary trading or traditional investment banking business. Sources close to the situation say that recent approaches to buy the business have valued Instinet at around US$500 million.
Under Nomura's ownership, Instinet has launched a range of alternative trading venues, most notably Chi-X Europe, the pan-European multilateral trading facility (MTF), which opened for business in March 2007, and its counterpart Chi-X Global which has launched venues in Japan and Canada, with plans to open in Australia by the end of 2011. Instinet also launched a US dark pool for derivatives trading, Options CBX, in August 2010; BLX, a non-displayed US block trading system in 2009; equities dark pool JapanCrossing in May 2008; a system for matching Korean equities trades pre-market open in April 2008; and the Blockmatch MTF in 2007. In addition, the firm built on its CBX ASIA trading platform, launched in 2001, by adding Hong Kong equities in 2009.
Instinet's Execution Experts suite of algorithms, offered to US clients in 2008 and since rolled out to Europe and Asia, contains a number innovative strategies including Cobra, which seeks hidden liquidity in both lit and dark venues while trying to minimise signalling and market impact, and Nighthawk, which seeks hidden liquidity, by intelligently accessing dark-liquidity sources to execute orders using price-modelling and allocation logic. The firm has also developed strategic partnerships with a number of research houses globally.
These projects have met with mixed results. Chi-X Europe has gained a market share of 16-17% of pan-European equity trading, and has been sold to rival trading venue operator BATS Global Markets, thought to be valued at around US$360 million. Conversely Chi-X Global has only seen significant success with its Canadian venue so far, which has around 10-12% market share. Investors are currently being sought to buy stakes in the firm which last year saw senior management, including the CEO and regional head for Asia, leave the business to lower costs.
During 2010, Instinet began to let go of personnel, culminating in almost 10% of its 180-strong European workforce being put on notice at the beginning of April 2011, including senior frontline sales staff. Although the firm is still reported to be profitable, profits are said to be lower in the period since the financial crisis.
Sources have observed that the client base served by Nomura and Instinet has become increasingly similar in Europe, placing the two firms on a more competitive footing than when they were first acquired. The former Lehman Brothers operations have been reinvented as Nomura's full service brokerage, with equities infrastructure built where it had not been acquired. In November a trading floor was opened in New York, while Samir Patel and Chris Valli, both ex-Lehman Brothers, were named as head of execution sales and head of US research sales respectively.
Other ex-Lehman Brothers personal have found senior positions across the franchise in Asia and Europe, most recently with Benoit Savoret, former Lehman Brothers chief operating officer, EMEA, being named joint head of global equities with Naoki Matsuba. Abenante will serve on Nomura's global equities executive committee reporting to Savoret and Matsuba.
Nomura's full year 2010 results are not due out until the end of April, but in the six months to September 2010, equities products accounted for 19% of its revenue, down from 25% for the same period the year before, due primarily to the stock market slowdown in developed markets, according to the bank.
The first quarter of 2011 has seen a jump in pan-European trading volumes, with March reaching €1.005 trillion, only the second time that the trillion mark has been breached since January 2008. A boost in volumes would perhaps revive Instinet's fortunes. Buy-side clients have been told that Nomura has not made any definite decisions about the subsidiary's future, although staff at Nomura have privately acknowledged the possibility of the business being folded into its parent. But officially management appears to have committed to Instinet's value proposition for the time being.
In his memo Abenante said, “Do not expect this initiative to affect in any way Instinet's clients’ experience, or the core principles of agency execution and technical prowess on which Instinet’s global businesses are founded.”