US electronic share trader Instinet has agreed to buy a rival company, Island ECN, in a $508 million, all-share deal to strengthen its hand against fierce competition and create a big new industry leader.
A marriage of Instinet, majority owned by Reuters and unlisted Island, its nearest rival, would create the largest alternative electronic trading network in stocks listed on the tech-heavy Nasdaq exchange - second only to the exchange's own electronic trading platform.
The pair would command more than a fifth of Nasdaq volumes, compared with about 30 per cent held by Nasdaq itself. The exchange plans to launch a new system, SuperMontage, next month to win back traders lost to the alternative trading networks.
Reuters said Instinet, which had about $700 million in cash at end-December, would also issue a special dividend of $1 per share to all Instinet shareholders before the deal is settled.
The merger fulfills long-held industry predictions of consolidation among alternative share dealers or electronic communications networks (ECN), which charge a fee to match up buy and sell stock orders electronically.
In the bull market of the 1990s some market watchers predicted that ECNs -- which enabled traders to move stock cheaply and quickly - would displace traditional share dealers.
But trading volumes - the lifeblood of ECNs - came under pressure after the end of the high-tech boom. Competition to woo traders in the two-year bear market has cut away at ECN profits.