Instinet is to buy rival alternative trading system Island ECN in an all-share deal valued at $508 million.
The move follows a torrid period at Instinet, which lost the top slot for Nasdaq share trading volume to Island in November last year and has since been scrambling to arrest an alarming slide in volumes. The company, majority-owned by Reuters, recently sacked its top management team after reporting a first-ever quarterly trading loss and warning of further losses to come.
In acquiring its closest rival, Instinet will be looking to correct the failings which enabled Island to overtake it. Instinet's slower execution times, insistence on proprietary terminals and higher prices had left the company fatally exposed to competition from nimbler competitors.
To smooth the deal, Instinet is to issue a special dividend of $1 per share to all shareholders. Reuters, which currently owns about 83% of Instinet will receive $207 million of the dividend. Its stake in the company will reduce to 62% once the deal is settled.
A combination of Instinet and Island will command about a fifth of stocks traded over Nasdaq - second only to the exchange's own trading system which handles about 30 per cent of sharedeals. Instinet will be looking to complete the acquisition in advance of looming competition from SuperMontage, the new Nasdaq Stock Market trading system that debuts in July.