Edward J. Nicoll, Chief Executive Officer of Instinet, commented: "Market volumes declined slightly during the third quarter, which is reflected in our revenues. However, we stayed on course to reduce costs, and have reported Instinet's first positive net income since 2001. In addition, we continue to strengthen our core businesses. Our institutional broker is developing new products designed to reduce its customers' opportunity costs and increase their prospects for interacting with natural liquidity. Our two electronic marketplaces recently cut prices significantly on routing services, further highlighting the advantages to subscribers of partnering with us to obtain the opportunity of high-quality executions at low prices."
Business Trends
- Our clients traded 34.2 billion U.S. equity shares through Instinet in the third quarter of 2003, up 29% from 26.5 billion shares executed in the third quarter of 2002, and down 8% from 37.1 billion shares executed in the second quarter of 2003. The decrease versus the second quarter of 2003 was due to the combination of lower overall average daily market volumes in the third quarter and reduced market share. The Island ECN accounted for 12.3 billion shares of this volume in the third quarter of 2003, compared to 1.4 billion in the third quarter of 2002, which included Island for one week subsequent to the closing of the Island acquisition.
- U.S. equity shares executed through Instinet during the third quarter of 2003 consisted of 29.3 billion NASDAQ-listed shares and 4.8 billion U.S. exchange-listed shares.
- Our share of total U.S. equity volume was 14.7% in the third quarter, compared to 11.1% in the third quarter of 2002 and 15.5% in the second quarter of 2003.
- Our share of NASDAQ-listed equity volume was 26.5% in the third quarter, and our share of U.S. exchange-listed equity volume was 4.0%.
Revenues
Total revenues for the third quarter were $272 million, down 5% from the second quarter of 2003.
Transaction fee revenue for the third quarter was $268 million, down 3% from the second quarter of 2003. Our net equity transaction fee revenue was $156 million, down 5% from the second quarter of 2003. (2)
Expenses
Instinet's total expenses from continuing operations for the third quarter of 2003 were $267 million, down 8% from the second quarter of 2003.
- Compensation and benefits expense was $51 million in the third quarter of 2003, down 15% from the previous quarter, primarily reflecting lower staff levels and a lower severance charge.(2)
- Brokerage, clearing and exchange fees were $36 million, up 6% from the previous quarter.
- Communications and equipment expense was $25 million, down 21% from the previous quarter, primarily due to the migration of clients from our proprietary network to a third-party network.
- Other expenses were $6 million, down 32% from the second quarter of 2003, mainly due to lower bad debt and interest expenses.
At September 30, 2003, Instinet had net cash (cash and cash equivalents and securities owned less short-term borrowings) of approximately $637 million, tangible net assets of approximately $883 million, and shareholders' equity of approximately $992 million. There were approximately 331 million shares of common stock outstanding.
Instinet's Chief Financial Officer, John F. Fay, commented: "Our performance in the third quarter reflects both the market environment as well as our continued focus on cost reduction. Our balance sheet remains very strong with our cash balance increasing by 12% to $637 million during the third quarter."
Strategic Developments
During the quarter, Instinet continued to make progress on its plan to separate its buy-side and sell-side businesses. The aim of this reorganization is to empower each business to pursue its own distinct interests, add strategic clarity to our company and lay a foundation for future profitability.
Instinet, the Institutional Broker, is a value-added broker that serves institutions around the world. Its products and services are designed to improve both the trading efficacy and investment performance of our clients. They include:
- Direct, efficient and unbiased access to the global equity markets, as well as the opportunity to trade directly with other Instinet clients.
- Sophisticated trading expertise and advanced technological tools designed to make it easier to manage increasingly complex global equity trading strategies.
- Unconflicted trading based on a pure agency business model. Instinet plans to release to clients before year-end two key brokerage products for U.S. equity trading.
Proactive SmartRouter will enable clients, in addition to routing marketable orders to the best available execution option, to post orders in more than one venue at the same time. In a fragmented marketplace like the exchange-listed market in the U.S., posting an order in one liquidity pool may carry the opportunity cost of missing the potential for price and size improvement in another liquidity pool. Proactive SmartRouter is designed to reduce that opportunity cost.
Our sell-side business is now made up of two alternative trading systems -- the Instinet ECN and The Island ECN, and their clearing broker, Instinet Clearing Services, Inc. We are in the process of integrating these two pools of liquidity into one single ATS, to be called "INET". INET will offer matching and routing services to its U.S. registered broker-dealer subscribers. INET will provide access to one of the largest liquidity pools in NASDAQ-listed equities. It will be based on the existing Island platform, which employs a stable and scalable infrastructure that enables speed and reliability while allowing the system to operate at low cost. INET will provide its clients with access to other U.S. trading venues utilizing Instinet's SmartRouter technology.
Instinet ECN and Island ECN recently announced a 25% price reduction for routing orders in over-the-counter securities to other trading venues through Instinet's SmartRouter. Further, retroactive to October 1, 2003 and effective through the end of this year, the price was reduced by an additional 12 percentage points for a 37% reduction overall. As a result of this price reduction, subscribers can now access marketplaces offering automated executions at a cost potentially lower than accessing those markets directly.
With these and other initiatives, Instinet Group is positioning its business to thrive in what continues to be a highly competitive environment. Equity markets in the U.S. may be on the verge of a phase of accelerated modernization that potentially could see a reduction in, or even the elimination of some of the remaining regulatory and other barriers to competition in trading exchange-listed securities. As we move toward a potentially more open and competitive environment, Instinet will be ready to serve those investors looking for technologically advanced products and services focused solely on customers' needs.
Webcast
Instinet will webcast a conference call to discuss its third quarter results at 11:00 a.m. New York time today at http://www.investor.instinet.com. A replay will be available at the same address following the call.
1Unless otherwise specified, financial results and statistical information referred to in this release include data for Island Holding Company, Inc. following the closing of our acquisition of Island on September 20, 2002.
2See table titled "Reconciliation of Pro Forma Operating Results for 3Q03".
Please click here to view Instinet Group Incorporated Consolidated Statements of Operations.
