Reuters expands Instinet with Island buy

Instinet, the electronic brokerage majority owned by Reuters, doubled its share of Nasdaq stock trading volumes yesterday with the acquisition of its biggest rival.

The company, currently 83 per cent owned by Reuters, will also pay a special dividend of $1 a share to existing investors, providing Reuters with a cash payout of $207m (£142m).

Instinet will buy Island ECN for $508m in stock, taking its share of trading of Nasdaq stocks from 11 per cent to about 22 per cent. Nasdaq's own trading platform accounts for 30 per cent of dealing in the stocks listed on the Nasdaq exchange.

Instinet has been losing market share, which hit the liquidity that it provides clients, and it has also been caught in a price war. The acquisition of Island should address both concerns, analysts said. It is also moving to bolster its position before Nasdaq introduces its new trading system, SuperMontage, next month.

Simon Cawdery, at ING, said: "This is certainly a good move. Instinet has seen a large part of its market disappear to the aggression of its competitors. This will provide a genuine competitive threat to Nasdaq." Mr Cawdery added that Instinet's wider ambitions were global, to provide the largest electronic trading platform not linked to an established stock exchange.

Instinet will also gain new management blood as a result of the deal, having recently parted company with its top directors. Ed Nicoll, the chairman of Island, will be chief executive of the combined company, while Matthew Andersen, Island's chief executive, will be chief operating officer. Island shareholders will own 25 per cent of the combined group, while Reuters' stake will be diluted to 62 per cent.

The two companies said that their strengths lay in different sectors of the market, so the merger was complimentary. Instinet has an institutional client base, while Island is focused on retail investors