The mauling followed a presentation in New York on Wednesday at which Instinet executives, including managing director Doug Atkin, briefed media analysts on subjects including Internet strategy, plans for the electronic broking unit and the progress of an online publishing joint venture with Dow Jones.
"The volumes in Instinet are quite critical to the profitability of the business and those could potentially be quite weak in the fourth quarter," said Meg Geldens, an analyst with Merrill Lynch who attended the meeting. "I guess in the last couple of months they've gotten a sense from their clients that it's really going to slow down."
Instinet executives apparently made reference to the fall-off in Nasdaq trading volumes during July and August. That served, in one analyst's view, to suggest Instinet volumes would also be lower-than-expected.
In response, Merrill Lynch and other brokers, including Salomon Smith Barney, cut 1999 and 2000 pre-tax profit forecasts. Current-year earnings are now expected to be some pounds 595m compared with pounds 580m in 1998. For 2000, earnings estimates have converged at pounds 630m versus some earlier estimates of pounds 700m.
Reuters yesterday issued a statement denying that price- sensitive information concerning its shares had been released. "The company confirmed that nothing was said at the briefing that could be construed as a profits forecast or a profits warning and there is no price-sensitive information which it should announce."
Sources, meanwhile, said some analysts had used the briefing as an excuse to bring their forecasts back into line with those of other analysts. "Those brokers with estimates above consensus would have looked for any excuse to bring them down," said a source.
The explosive response to possible weakness at Instinet is a consequence of it being Reuters' fastest-growing business area. Since the mid-1990s global trading, independent of exchanges, has soared, and Instinet has carved out a niche as the leading electronic system. A move into bond trading is being planned. As the biggest electronic trading network, Instinet matches buy and sell orders for stocks from institutional brokers. It had also just begun a trial program in partnership with E-Trade to offer after-hours dealing to US retail investors.
Rising competition for trading commissions has seen Instinet buy stakes in upstart competitors. In July it bought a 16.4 per cent interest in Archipelago, an electronic network. Reuters has also led a consortium that bought 54 per cent of Tradepoint Financial, a UK electronic stock- trading system that is challenging the London Stock Exchange.
Reuters' growth-stock reputation hinges, in large measure, on Instinet and other transaction services. First-half sales at the unit gained 23 per cent to pounds 255m, though rising development spending meant that operating profit edged up only 6.7 per cent to pounds 80m.
Information sales, notably price data from markets around the world, account for 60 per cent of sales, but the unit's sales growth has only averaged 7 per cent annually in recent years.