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Instinet: How Not to Run a Trading Network


When Tom Glocer took over as CEO of Reuters Group PLC (RTRSY) last July, it signaled a new era at the 151-year-old British company. Glocer, 42, the first American to run Reuters, had grand plans to restructure the financial-services and media giant. In 10 months on the job, though, Glocer has lurched from one crisis to another. "I'm not sure Tom ever expected he'd face a first year like this," says Michael Nathanson, a Sanford C. Bernstein & Co. analyst.

The latest upset came on Apr. 9, when Douglas M. Atkin stepped down as CEO of Reuters' Instinet Group Inc. unit (INET), the pioneer electronic stock trading system, barely two weeks after Instinet warned of an operating loss in the first quarter. The reason: Customers had defected in droves to cheaper trading venues after Nasdaq began quoting prices in decimals and trading profits shrank.

That was a serious hit to Reuters' finances. Instinet accounted for 22% of its revenues in 2001, and 28% of operating profits. But it was only one of several blows, most of them stemming from the downturn on Wall Street. While Reuters' revenues grew 8% in 2001, to $5.6 billion, operating profits fell 26%, to $438 million. The company has warned that subscription revenues, mostly from financial data and news--about 70% of revenues--will decline by 2% to 3% in the first half and more in the second half of this year.

On top of that, Reuters faces a declining market in its once dominant foreign-exchange trading system. And the company hasn't been able to compete with Bloomberg LP in data terminals for certain services. "Bloomberg is the screen of choice at the upper end," notes Bernstein's Nathanson.

The Instinet debacle, say analysts, points to a key problem for Reuters: It hasn't focused on customer service or costs for decades. "It has basically operated like an arm of the British foreign service," says one analyst.

Glocer, a lawyer who has a reputation as a technology wonk, says he will restructure Reuters over five years. His plan includes cost cuts and organizing the business around customer groups rather than geography. Reuters is also spending $667 million over the next three years to upgrade technologies so that it can deliver its products over the Internet instead of proprietary networks.

To fix Instinet, Glocer has installed its chief financial officer, Mark Nienstedt, as acting CEO, but won't say what the long-term strategy is. The company has already begun slashing fees--one reason for the hit to its bottom line.

Analysts have speculated Reuters will buy back the 17% of Instinet in public hands. Nathanson says if Reuters purchased the public shares at a 15% premium to its current price of around $7, it would still have $474 million of Instinet cash left. Other possibilities are to seek a partner, possibly even rival network Island ECN, or sell the company outright. "If Reuters can tidy it up, they can dispose of it when conditions are better," says Johnathan Barrett, media analyst at London-based brokerage Teather & Greenwood Ltd. Island CEO Matthew F. Andresen gleefully says, "I'd be delighted to look into buying Instinet." Glocer won't say whether he and Andresen have talked. He does say the bottom line is that Instinet "has to have operating logic for the overall Reuters Group."

In essence, that's Glocer's big challenge for the whole company. Knitting its disparate businesses into a coherent whole and keeping them competitive might just make his first ten months on the job look like a summer vacation. By Tom Lowry in New York and Pallavi Gogoi in Chicago, with Kerry Capell in London


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