Nasdaq to Buy Instinet System

Nasdaq Stock Market Inc. agreed to acquire Instinet Group Inc.’s electronic trading network for $934.5 million, a move intended to improve Nasdaq’s position as competition grows among the world’s stock markets.

The long-rumored announcement Friday came two days after the New York Stock Exchange said it would merge with Archipelago Holdings Inc., operator of the ArcaEx electronic trading market, a surprise move that boosts the NYSE’s electronic trading offerings and increases its competitiveness against Nasdaq and other markets.

Instinet’s trading technology -- considered the fastest and best in electronic stock trading -- was a major factor in the deal, which would increase Nasdaq’s market share in trades of its own listed stocks as well as NYSE-listed shares.

“This transaction will position us to offer investors increased choice in listed stocks on other markets as well as increased liquidity in Nasdaq-listed stocks. [Instinet] is the ideal partner for us to offer investors the best outcome for their trades,” Bob Greifeld, Nasdaq’s chief executive, told reporters at Nasdaq’s MarketSite in Times Square.

The deal would make Instinet’s technology the predominant electronic trading platform in the U.S. equity market. Nasdaq would abandon its own system to standardize on Instinet’s platform.

Instinet’s broker-dealer arm, to be run by Instinet CEO Ed Nicoll, would be sold to a private equity group, Silver Lake Partners, for $207.5 million. Another Instinet subsidiary, which manages commission rebates, would go to Bank of New York for $174 million. The deal also would include $562 million in cash that Instinet currently holds, bringing the overall value of the sale to just under $1.9 billion.

Shares of Nasdaq Stock Market surged $2.78, or 26%, to $13.43, and Instinet shares fell 51 cents to $5.19. Both stocks trade on Nasdaq. Instinet said in a release that investors would receive approximately $5.44 in cash for each share.

To finance the Instinet purchase, Nasdaq would take on $955 million in new debt, to be paid within six years. Nasdaq said that it expected to save $100 million from synergies over the next two to three years and to pay off the debt before it came due.

The NYSE deal and the Nasdaq purchase would put the two markets -- the 212-year-old icon versus the slick, fully computerized upstart -- into a head-to-head competition that would probably result in a variety of new investment products and lower transaction fees for both institutional and individual investors. Greifeld said the NYSE-Archipelago deal was not a factor in the Instinet acquisition.

Nasdaq’s CEO took a jab at its larger, older rival -- and the human specialists who manage NYSE floor auctions -- in extolling Nasdaq’s all-electronic trading systems.

“We do not anoint anyone as a specialist or monopolist. It is the best of both man and machine,” he said. “We certainly accept the flattery of their imitation.”

The Archipelago deal would give the venerable NYSE, known worldwide for its trading floor, a strong electronic trading platform that otherwise would have taken years to develop.