Instinet - The First Electronic Communication Network

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Case Details:

Case Code : ITSY018
Case Length : 08 Pages
Period : 1987-2001
Pub Date : 2002
Teaching Note : Available
Organization : Instinet
Industry : Electronic Communication Countries : USA

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Background Note

Instinet, then known as Institutional Networks Corporation, was founded in 1969 in the US, and it pioneered the concept of electronic stock trading. Initially, Instinet ECN was designed to enable institutional money managers to trade in listed stocks directly with each other with the objective of reducing the trading or transaction costs...

ECN: The Virtual Stock Exchange

An ECN is an electronic trading system that matches customer buy and sell orders with direct electronic access. With the influx of new technologies, markets around the world seemed to be undergoing a rapid transformation.

Innovations in networking technology and the growing popularity of the Internet has led to a boom in the ECN market. In 2000, ECNs accounted for about 30% of the total share volume in Nasdaq stocks and 3% of exchange-listed stocks...

Instinet - A Hybrid Trading Model

Instinet offered two different trading options - a standard crossing arrangement and a continuous trading system (Refer Figure I). There was a central order book in which investors entered orders. The book was accessible through Instinet's proprietary terminal, supplied free of cost to brokers and institutional investors. Instinet's trading system was different from other ECNs in that it did not offer automated matching facility. It offered an interface which enabled investors to view different trading interests and negotiate electronically...

The Future of Instinet

By late 1990s, competition in the ECN market had intensified. By early 1999, there were 9 ECNs registered with the SEC and Nasdaq. These new entrants gave a tough competition to Instinet. Instinet's competitors like Island and Archipelago took advantage of the latest networking technologies and reduced transaction costs and attracted more order flow. Moreover, competition in Nasdaq trading also increased. Therefore, Instinet was looking at other markets to increase order flow. It was collaborating with other ECNs, expanding services, and to enter international markets...

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