納斯達克交易所 (NDAQ) 2001 Q4 法說會逐字稿

Good afternoon, this is

and I'll be your conference facilitator.

After the speaker's remarks there will be a question-and-answer period. I'll provide further instructions before we take questions.

I would like to turn the conference call over to Harlan Flint, SVP of Investor Relations at Instinet (Company: Instinet; Ticker: INET; URL:http://www.instinet.com).

Mr. Flint, you may begin the conference.

Good afternoon, and welcome to Instinet groups conference call, to discuss fourth quarter earnings.

During this conference call, we may make statements that are forward-looking in nature. Our actual results may be materially different from the results anticipated in those statements.

You can find a detailed discussion of certain important factors that could cause these differences between actual and anticipated results to material from our expectations, in the prospectus to our IPO and other documents filed with the SEC. Which are available on our Web site.

You will hear today from Doug Atkin, Instinet's President and CEO and Mark Nienstedt our CFO. Mark Nienstedt will speak first.

Thank you, Harlan and good afternoon.

I'm Mark Nienstedt, Instinet's Chief Financial Officer, and I'd like to welcome you to Instinet's fourth quarter earnings call.

On a reported GAAP basis, Instinet had net income in the fourth quarter of $45.7 million and earnings per share of 18 cents, excluding investment gains, restructure cost and excess insurance recoveries, related to the September World Trade Center attack. These amounts are $34.8 million and 14 cents, in line with analyst estimates.

For Instinet, the fourth quarter had a number of significant items. I'll discuss fourth quarter financial highlights and also make some comments on 2002.

First, I'll go through the major items of trading volumes, revenue and expense. Instinet's U.S. equity trading volumes are impacted by overall market volumes and Instinet's average market share. Fourth quarter to fourth quarter Nasdaq volumes were down by about seven percent, with Instinet's market share on Nasdaq down from 13.9 percent to 11.7 percent.

Instinet traded at 14.0 billion Nasdaq shares in the fourth quarter, compared with 17.8 billion shares in the fourth quarter of 2000 and up from 13.0 billion shares in our prior quarter.

The 2.2 percent decline in Nasdaq market share from 13.9 to 11.7 percent is attributable to reduced volumes from our broker dealer customers.

In the fourth quart of 2001, trading by broker dealers accounted for about 9.2 percent of our Nasdaq market share out of our total 11.7 percent. In the fourth quarter of 2000, this group accounted for approximately 11.5 percent market share, out of the total 13.9 percent. Over this period, institutional volumes have remained relatively steady, to the overall market.

As we indicated when we discussed third quarter results, the U.S. broker dealers and market makers in particular, have been significantly impacted by decimalization and the overall declines in Nasdaq share values and share volumes. Not surprisingly, during the fourth quarter, trading volumes from this group declined.

Instinet worked with these broker dealer customers to develop pilot placing plans. These pilot plans included incentives to increase our Nasdaq liquidity and increase our volumes overall.

Our Nasdaq market share reached a low of about 10.7 percent in December, but has shown improvement in early 2002.

Fading and exchange listed stocks increased overall by about 20 percent with Instinet's market share remaining steady at 3.2 percent. Instinet traded 3.2 billion shares in listed stocks, up form 2.7 billion in the year earlier quarter.

In the fourth quarter, broker dealers accounted for 72 percent of our U.S. share volumes, 44 percent of our net U.S. equity transaction fees. And 36 percent of our total net transaction fees. These figures are down from 77 percent, 49 percent and 42 percent in the fourth quarter of 2000, respectively.

Average pricing, as measured by average transaction fees we receive per side, per share, decreased in the fourth quarter to about 61-100ths of a cent per share, compared to 69-100ths in the year earlier quarter. And also 69-100ths in the third quarter of 2001. This average price, reflects the impact of the pilot pricing changes, I just discussed.

Looking forward, we now have implemented a revised pricing plan for broker dealers that post liquidity. This new pricing plan is effective February 1st of this year. We expect that the full impact of the new pricing, will be to reduce our average pricing for U.S. shares by a further 12 to 18 percent from the 61-100ths of a cent, in the fourth quarter.

Fourth quarter net non U.S. equity revenue was $46.5 million, a slight increase over the 46.1 million in the fourth quarter of 2000. In the recent quarter, this represented 18 percent of net transaction fees, up from 14 percent in the year earlier quarter.

As was the case in the third quarter, the strongest performing group was the hedge fund group. Hedge funds are priced below traditional fund managers because they tend to be more self sufficient.

Market share in major European markets, measured on a value of trade basis, were at all time highs.

In July of last year we announced plans to reduce our operating expense base. As a result of the actions we took in implementing that plan, our fourth quarter expenses were at their lowest levels since the first quarter of 2000, exceeding our initial expectations.

Excluding variable costs, our underlying cost base in the fourth quarter, on an annualized basis was about $150 million below our annual rate in the first half of 2001.

We ended the year with worldwide staff count of 2,132 down from 2,210 a year earlier. After including a 157, staff who came to us when we acquired ProTrader.

We have continued to reduce communication and equipment costs, as a result of improved network efficiencies, both in the U.S. and internationally. And we have significantly reduced discretionary spending.

Looking ahead, we believe we'll be -- we will be able to achieve further reductions in our cost base. By the end of the second quarter, we plan on reducing our annual cost of run rate, by a further $60 million. This will be achieved by planned efficiencies in our technical deliver platforms, further reductions in staff. And reductions in related facilities cost.

We have all ready begun to implement these reductions. Our current staff count is not just under 2000. And we expect to be about 1800 by mid year. We expect to achieve these reductions without diminishing our ability to provide high quality service to our customers. And without diminishing our capacity to design, develop and deploy innovative new technology.

Our balance sheet remains very strong. Our stockholder's equity, the book value of Instinet, totals $1.46 billion at December 31st, 2001. Compared to 930 million a year earlier.

At 2001 year end, net cash exceeded $1.18 billion including about 300 million held for customers. Goodwill totaled $145 million including approximately 65 million recorded in connection with our ProTrader acquisition.

In the fourth quarter, we also recorded a $65 million intangible asset, representing the valuation of intellectual property acquired with ProTrader. And have now begun amortizing this amount over a seven-year period.

I'd like to say a few words about how we see 2002, from a financial perspective.

Our plans are largely in place. We have initiated a major pricing change, designed to significantly improve our competitive position. Together with system performance enhancements, we have all ready made, we expect to build our Nasdaq liquidity.

As importantly, we have developed or acquired strong product offerings, designed to address the needs of our major customer groups. These product offerings are applicable to all major global markets.

We anticipate our second quarter 2002 net transaction fees will exceed the levels we obtained from the fourth quarter. And from then, healthy double digit growth going forward. We base this expectation on current market volumes, and have not counted the potential benefit of market volume growth.

Over the first two quarters of 2002, as we fully implement the pricing changes and obtain our targeted cost reductions, we did not expect to hit our pre tax margin target of 20 percent. But we do expect to be at a 20 percent rate in the second half of 2002.

Now, I'd like to turn the call over to Doug Atkin, Instinet's Chief Executive.

Thanks a lot, Mark, and good afternoon everyone.

From Instinet's perspective, the second half of 2001 was characterized by upheaval in the U.S. markets and economic weakness both here and abroad. This environment has presented our industry and our company with certain challenges.

The biggest of which being the impact decimalization has had on Nasdaq market makers. And those firms, like Instinet, that serve them.

At Instinet we are very focused on ensuring that we meet these challenges, that we continue to build on our considerable strengths. And that we make the necessary adjustments to enhance our performance moving forward.

It is also worth mentioning, that we view this as an industry ripe with opportunity. I firmly believe that our strategy to expand Instinet's global brokerage business and to maintain and grow our Nasdaq liquidity pool, will create significant value for our customers, and our shareholders. And I am confident that our team will execute it's plans with success.

Regarding brokerage. Instinet has always been and is, about improving in customer's performance. And one of the best ways to judge how well we succeed is, to review the results of independent transaction cost measurement studies.

Two of the most widely followed independent trade performance consulting firms are

and Abel

.

And in a report published last month, based on data for the 12-month ended September 30th, 2001, the

group ranked Instinet, first, in execution quality in Nasdaq listed stocks when compared to the universe of the 12 most active full service brokers. Instinet also tied for first in execution quality in New York Stock Exchange listed stocks when compared to the same universe.

The most recent Abel

trading report which was published in the fourth quarter, and based on data from the second quarter, calculated that on average the total cost for Nasdaq listed stocks executed through Instinet was 7.2 cents per share lower than the average for the large universe of brokers, Abel

tracks. And for listed stocks were 7.6 cents better than the Abel

average.

I think this is why customers want -- can continue to want what Instinet sells. We helped them save money and improve their performance. And we do this not just in the United States, but also around the world.

Our aim in 2002, is to substantially improve our brokerage offering, by delivering a range of products and services that are priced competitively and designed to meet the needs of targeted customer groups. I want to cite a few of the most important examples.

We just recently introduced new block trading and market Interaction functionality, that enables our clients to trade large orders more effectively inside Instinet and to go out and grab liquidity outside Instinet, in any major market, if that means getting best execution.

Another recent development is the launch of Jap -- of Japan Cross Securities company, a 50-50 joint venture between Instinet and

Salomon Smith Barney.

Officially launched in November 2001, this is a business that enables domestic Japanese and overseas market participants to trade Japanese equities in a fixed price cross, at each day's volume weight average price. At it's early days, the activity looks promising.

In addition, over the next two quarters, we will be rolling out two very important products to our clients. The first product, based on the pro trader technology that we acquired in the fourth quarter, is a front end trading application aimed primarily at active fund managers and hedge funds.

We also plan to deploy a new global program trading application, that has been developed with and for our big list trading clients in the U.S. and Europe. We feel, that these new products and trading functionality when combined with our increased sales focus and strong liquidity pool, will improve our all ready leading position in getting clients best execution.

With respect to our Nasdaq liquidity pool, we have taken decisive action to better meet the needs of market makers and other sell side customers. As you may recall, I stated on our Q3 call, that we were rolling out to a dozen or so large customers a pilot program, with incentives through liquidity providers to trade with Instinet.

The pilot included better connectivity, improved functionality and lower prices which has become a lightening rod issues for market makers, in the present environment.

While the program seems to be bearing fruit, as these customers have responded positively. And in January, our market share was up, over December levels. And after meeting with our major sell side clients and making a number of adjustments to the initial scheme, in February we finalized our liquidity plan for broker dealers.

In addition to cutting the per share rates that liquidity providers pay, we have also restructured certain other charges, to allow a better apples to apples comparison of our pricing with that of our low end competitors. Lots of different ways to charge. And, we're trying to the best we can, to put out something extremely competitive on an apples to apples basis to that customer group, as well as other customer groups.

Concurrently, we are working closely with the brokers, and their vendors, to improve the connectivity between our trading systems. To be more specific, customers with computer to computer connectivity to Instinet are being moved to technology that provides response times of less then three-tenths of a second. That's down from 1.2 seconds, just six months ago.

The bottom line is, that we believe our liquidity plan, together with the other initiatives underway will enable Instinet to maintain and grow its position as a significant Nasdaq liquidity pool.

Now, I'd like to update you on our other liquidity pool business, that being Instinet fixed income. We are currently in detailed discussions with two major global banks, that subject to the signing of definitive agreements will provide liquidity and product support to the business.

We believe, that this will enable us to build on our competitive position in key government, and other liquid fixed income markets. And in return, the banks will have a right to acquire an ownership stake in our fixed income broker which is currently 100 percent owned by Instinet.

Moving to our cost reduction program, while our Nasdaq market share has stabilized and is improving, our price reductions will impact revenues from the broker client groups, and we will start to see the full impact of our liquidity plan for the first time, this quarter.

In anticipation of this, an in view of the overall competitive environment, we are taking further aggressive action to reduce cost.

As Mark has all ready discussed in some detail, we intend to reduce our annual fixed cost run rate by approximately $60 million during the first half of the year. And in connection with these savings, we expect to incur a pre tax restructuring charge of approximately $25 million, during the first half of the year.

So looking out on the year, what do I see?

Well, First, I see the first half being defined by three major programs, first, the roll out of our new products and functionality to the buy side client groups. Second, the roll out of our liquidity plan to the sell side client groups. And third, the restructuring that will significantly reduce our cost base.

I see the benefits of these actions, largely appearing in the second half of the year. And I am confident that the results will be a company that has an improved competitive position and cost platform. A company with improved market share, and very good prospects for revenue and profit growth.

And perhaps, most important, a company that more than ever continues to deliver on its promise to increase customer performance through better trading.

This will be a challenging year for Instinet. But, I think we have a well grounded plan to achieve our objectives, and a great team of people to go out and get it done.

And with that, we're happy to take some questions.

We will now begin the question-and-answer segment of this conference. If you have a question now or at any time during the remainder of the call, please press the number one on your telephone keypad and listen for a tone.

The tone indicates that your line has been placed in the queue to have your questions answered. Please make sure to take your phone off mute, as soon as you here the tone.

Questions will be answered in the order that they are received. When it is your turn, I will call your name. If you are using a speakerphone, please pick up the handset before speaking. Begin by stating your name, and then ask your question.

We request that you limit yourselves to one or two questions. You can withdraw your question at any time by pressing the pound key.

One moment for the first question.

This does not sound right. Something seems to be amiss here.

Glenn Schorr of Deutsche Bank, please state your question.

Thanks, guys. How are you?

Here's -- I'll do the two questions. Number one is, you didn't mention anything about -- may you can get a comment on your ability to book, maybe market safe revenues.

Certain of your competitors have all ready started doing this, and have moved actually to the Cincinnati exchange, where they're getting huge share economics.

Is that something that's doable for Instinet? And is it part of your '02 financial plan?

It's something that you know we're analyzing closely. We are talking to the logical parties

Nasdaq

market data monopoly breaks down.

We do see opportunities. And I think as things progress, we will be talking more on this subject, later on in the year.

Any -- any way that you could quantify the opportunity? I mean, it just seems, that it -- someone's willing to pay for it. You have to share -- maybe help explain why it's a little more complicated than it appears.

Yes, Glenn, I think one of the issues that's in the analysis is, that if you do move or plan to move another exchange to print your Nasdaq trades and share in the tape revenues.

Nasdaq has just come out with some pricing which -- or some pricing proposals which we certainly have problems with, which actually raise the rates on the things you have to do within Nasdaq if you move your trade reporting to another exchange.

So this is a complicated issue. It's changing on a daily basis, but we will take advantage of any opportunity that's out there.

I appreciate that, and I feel your pain.

Maybe the second question on a related topic is, Nasdaq's looking to go into testing, I guess in April, begin the roll out in July.

Maybe just an update on your thoughts on the progress of the, you know, the alternative display facility. Do you think it will be ready in time? Has it changed your thinking strategically?

The guy seems to understand the basics of the industry.

We've been talking lot to the NASD and to other -- and to participants in the industry market makers, institutions other ECN's about the alternative displace facility which we think is, you know, potentially very interesting to have the option to move your Nasdaq or our Nasdaq business to a neutral playing field, so to speak, the ADF.

We are in detailed discussions with the NASD on the specifications and what we would like to see. And what we think others would like to see, including market makers who we think should take a

-- are taking serious look at the ATF. So that is moving along.

But, I think it's quite a ways off from being built.

And correct me if I'm wrong, Nasdaq can't go ahead with super montage unless the ABS is in place.

That is certainly the current position at the SEC, yes.

OK. Well thanks very much.

Ms. Amy Beautte of Bear Stearns (Company: The Bear Stearns Companies Inc.: Ticker: BSC; URL: http://www.bearstearns.com/), please state your question and your name.

Good morning. Good afternoon. Sorry.

Doug, when you went public, you said, the reason was to get stock to use for acquisitions and to incent employees. And that was a necessity and to do that you needed to be independent from Reuters.

Now, with the stock prices where it is, it doesn't seem like you can really use the stock for acquisitions. And it has less of an impact on incenting employees.

Is there a possibility of an infusion from Reuters, in order to help you go out and perhaps buy some market share? Are you thinking about re-valuing some of the option grants you've given to employees?

How is this effecting your relationship with Reuters?

I think that you know, the overall relationship with Reuters continues to be strong and Instinet continues to be a fairly significant strategic asset or significant strategic asset to Reuters.

Yes, we went public in May. And, you know during -- you now today's world is a lot different world in Nasdaq trading in particular, than it was in May. The world has dramatically changed.

But, I don't think that really changes the rational for Instinet for being a public entity.

As I said in my remarks, I think we have some -- some plans and some very good plans to go out and grow our global brokerage business. And to continue to maintain and grow our liquidity pool.

And, as we are successful in doing that, I think the reasons that you stated for going public in the first place, will become even stronger once again.

Are you planning no re-pricing your options? And is it a possibility in Reuter's current strategy that they could infuse you with more capital if the right deal came around?

On the options re-pricing, no. There will be no options re-pricing.

In regards to infusion of capital, I mean that's really something to be discussed with Reuters. But I would just say Reuter's certainly as the majority owner of Instinet wants to make sure that Instinet continues to grow.

And we believe, we'll do whatever is appropriate to help us grow the business.

Thank you.

Mr. Greg Smith of J.P. Morgan (Company: J.P. Morgan Chase & Co. ; Ticker: JPM ; URL: http://www.chase.com/), please state your question.

Hi, this is actually Adam Townsend on behalf of Greg.

Just a quick question, is there currently any revenue in the transaction fee line from the fixed income business?

Yes.

Is that not -- you're not going to break that out or disclose the amount of that in any way?

We have not broken our fixed income revenues in the past. And we aren't currently, you know, looking forward depending on who things work out, we may consider doing that.

Our fixed income revenues are small compared to our equity revenues. They're growing. We have in so far this year, we've got a nice jump up in our average daily fixed income revenue.

OK. And then, on the restructuring -- the $25 million restructuring that you expect to occur during the first half of 2002, for modeling reasons, how should we try to break that up or allocate that to the first two quarters of the year.

It's difficult which is one of the reasons we sort of framed it as first half. We've taken some steps and actually encouraged some of those costs over the several weeks.

It's hard to know, how it will fall with the sort of March 31st date. But, you might -- you know as a starting point, you might want to just split it in half.

OK. And then just my last question, I know you've implemented the pilot -- the pricing changes for the broker dealers starting in February.

We've noticed that your market share looks like it's picked up a tiny bit since that time. Is there any other dynamic going on that you see in the market place? And maybe savoring trading on -- in Instinet versus other venues?

Basically, is there any reason that the market share rising, other than pricing right now?

Yes. You know I would say again, pricing is only a part of it.

Certainly, the increase in speed and performance of the system both in terms of up time, and in terms of the actual speed to get orders in out of the system are critically important, to you know, large numbers of clients. And we've improved the speed and the performance of our core trading system.

We offer you know, much richer functionality than many other electronic venues. The anonymity we offer is key. And the connectivity to the broker dealers on trading systems, is something that we've spent a lot of time and effort on, over the last couple of months.

You know you are seeing an up tick. I would say, that's after a lot of hard work by a lot of people at Instinet and at our clients, to you know better integrate Instinet's trading technology into their business process.

OK. Great. Thanks a lot.

Eric Wasserstrom from UBS Warburg (Company: UBS AG; Ticker: UBS; URL: http://www.ubs.com/), please state your question.

Thanks.

Two questions. One a strategic issue. And the other just a simple modeling question.

Do your -- you know, clearly, you're placing a lot of eggs in the international basket. But, as we look at the profitability dynamics of that market, and I recognize that you price off of you know a value basis and that as a whole, has moved around as foreign markets have moved around.

The general trend, has basically been the same as in the states, with pricing you know basically becoming much, much thinner. And given the fact, that you could argue that the logic of someone like Instinet in those markets which tend to be, at least in Europe, highly automated all ready is maybe less.

You know, is that -- is that really something that's going to be you know to carry you out of our current bind in terms of where you stand as a liquidity player in the Nasdaq having lost a lot of share over the past few quarters?

Well, I would say, that you know we feel we have a very well grounded plan to grow our U.S. liquidity pool, our Nasdaq liquidity pool, as well a our global brokerage. So including you know Nasdaq, U.S. listed and our -- in overseas markets.

Our non U.S. equities represent about 18 percent of our overall revenues. And I would just say, it's a significant -- one it's a significant competitive advantage for Instinet, to go into the big fund managers.

For example, a big index fund who does global re-balancing, and if you can go in with a new product like our new portfolio trading application. And say, we are able to handle a three or $400 million

re-balancing.

You know, no other electronic provider can get -- is near getting into that game. And that is a major -- I think major differentiator for Instinet.

And, if you look at the transaction costs that we -- transaction cost performance in none U.S. markets

proved consistently again, at the top of the charts in European and Asian markets.

So regardless market structure, regardless of whether they have the virtual central and order books, we think Instinet, then give us the rules, give us the market structure. We'll put a recipe together to lower people's transaction costs anywhere.

I wouldn't disagree at all, that you guys are certainly you know head and shoulders above most of your competitors, in that respect.

I guess, the question I'm trying to get to is, you know given the dynamics of the domestic market, certainly on the Nasdaq areas which has been heretofore your bread and butter.

Is the listed and international and global portfolio trading enough to sustain you and keep you at the 20 percent long-term margin level?

Well as we've looked at building our financial view of 2002. We're doing a number of things in the Nasdaq market, that will enable us to improve our financial performance there, or other things that enable us to build our volumes there.

And we're doing a number of things with mostly bite sized firms, in terms of improved services and products to them. And we think, that the combination of the two, get us to a model where we're 20 percent pre tax margins, in the second half of '02.

It's not necessarily that we substitute international with Nasdaq

both of those areas.

Right. And thanks very much for that explanation Mark.

Just the last quick question is, your tax rate for '02, what are you forecasting there?

Well, if you're taking a look at what we've sent out, we've gotten our tax rate down a little bit in '01, from the percent it was the year before. I think we're just under 43 percent for the year, as a whole.

And we used in our model, the 44 percent that we've understood. But, I do think as we continue to work this year, we've got an opportunity to get back down to the '01 level or even a little bit below it. But at the moment, you know we're -- we'd stay with 44 percent.

OK. Thanks very much.

Barry Chubrik of Credit Suisse First Boston (Company: Credit Suisse Group; Ticker: CSGKY; URL: http://www.credit-suisse.com/).

Please state your question.

Hey, Doug. Hey Mark.

A couple of questions.

One, can you give us a sense on what as you look at the OTC market and some of the market makers moving to more of a commission structure, just I guess what impact do you expect that to have on Instinet. And also kind of what impact if any to -- that that may have on volumes.

Thanks.

Yes. Good question.

Yes, I think it could be -- there's a lot of unknowns on the agency side. How it's going to be implemented that traditional firms, and each firm I know is handling it a bit differently.

But, I would say, in general, if the market making firms, who have been hit pretty badly by decimalization, when you think about it, profitability has been hit pretty badly by decimalization. You get four or five cents per share from the institutions to trade, then, at our lower prices are going to look -- it takes the price

-- price pressure off of us, even a s we've lowered prices. So I think that could be a positive.

I also think, in terms of the agency, we just go out to the buy side and continue to say, we feel that -- if -- however you measure total transaction cost, that Instinet will be -- and should be your destination of choice.

And I don't think agency really impacts that greatly, with the small exception of traditional firms who have historically, really, only gone out and sold the capital commitment business, are now selling both capital commitment and agency trade.

But at the end of the day, I think it all comes down to total transaction costs. And we always measure up well, when clients look at that.

OK. And just one other question.

On the roll out of the ProTrader front end, can you just give us a sense on how that's proceeding? And it sounded like that -- it will be kind of, at least implemented over the first half here.

Just give us an early sense on the progress there. Thanks.

Yes, it's all ready at a few customers being beta tested and used. Our goal would be in, you know, by -- within the first half of the year, to have approximately 60 to 70 client sites installed with the -- with that trading application. And with a ramping up of that in the second half of the year.

OK. Thanks, guys.

Once again, if you have a question at this time, please press one on your touch-tone phone. Just a moment for the next question.

Michael Lipper of Lipper Advisory Incorporated, please state your question.

Good afternoon, Doug, Mark.

Two questions, following up on the question about international, can you give us a rough break down of how much of that 18 percent of revenues are -- is not in U.S. dollars.

Yes, Michael, all of that -- all of that 18 percent are revenues that are not U.S. dollars.

They -- excludes all of our international customers trading U.S. stocks. So it's predominantly euro based revenue, some significant U.K. based revenue and some significant yen based revenue.

But, euro would be the single main currency, that's driving that revenue.

And coming from clients all over the world.

Have you ever revealed the amount of U.S. dollar business from international clients?

We have not separately disclosed the components of our U.S. business, between the U.S. buy side and the U.S. sell side and non U.S. customers.

There is a significant amount of business each day, that we receive from a pretty broad cross section of non U.S. customers, primarily Europe and Japan in U.S. equities. And, they're both Nasdaq stocks and listed stocks.

And looking at the -- your decline in market share, how much of that could be attributed to the ETF impact?

In my opinion, it's actually quite small. I think as derivative products, have you know historically been brought into the market, they've actually had a positive impact on the underlying cash instrument.

But, it's something that you know we keep a close eye on, particularly the queues. But, a lot of the queue trading is being done by people hedging their cash position.

Thank you.

Thank you.

Richard Repetto of Putnam Lovell, please state your question.

Hi, Can -- hi guys can you hear me?

Yes, anyway, my question is Doug, on pricing, do you feel like your -- do you feel like the pricing competition -- the pressure is at a bottom at this point?

Do you expect it -- do you expect it getting worse over the next, you know, quarter or to? That's the first question.

Second, are you experiencing any pricing pressure on the institutional side?

I think on your -- you know on the broker dealer side, or on the liquidity pool side, you know we have taken our prices down to a point where, I think given the entire package, speed, functionality, anonymity, connectivity, you know we are you know, very, very competitive with anybody.

Will there be continued price pressure? You know, possibly, but I don't think it will be as intense as it has been, as consolidation is all ready starting to occur with the

merger.

But, it is certainly you know, there's no assurity there.

On the buy side, the buy side commissions have stayed fairly consistent -- have stayed fairly consistent between the buy side and the sell side.

You know as a full service rates at five -- you know five to six cents. And, while we see you know, certainly you know some pressure from some of let's say the hedge fund segment, a little pressure. We are selling ourselves on the total transaction cost. And we seem to be doing quite well, on that point.

OK. And then, one last thing Doug, on -- every day and I guess we're not the only ones that do this. But, we look at your market share, the top 100 Nasdaq stocks that you trade, up until last week when you reported, I guess for the week.

The last week in January volume, you know we could get a pretty good gage, with a real correlation going all the way back to you know September on what your market share of the Nasdaq 100 and then what you would report.

Right.

But last week, you know, it changed significantly. And this follows on the question earlier, it would appear to us, that your market share might have picked up in the non top 100. And I'm trying to get your comments on that.

Yes, well I think you know I wouldn't -- you know one week is one week. But certainly, I think the pricing -- you know, our liquidity plan, you know certainly goes out and in a sense, the broker dealer client group, to provide liquidity in you know NDX stocks and non NDX stocks.

And where we used to charge broker dealer customers, as you know the same commission on you know whether you were initiating or you were responding. We changed that -- we changed the structure of our commission scheduled to, very much incenting people to post liquidity. And charging you know higher rates to respond.

And I think in small cap stocks, you will likely see -- have that have a positive impact.

But, I think it's too early to say, to make any conclusions on one week's data.

Great. Thank you.

Yes.

Neil Carter of ABN Amro (Company: ABN Amro Holding N.V.; Ticker: ABN; URL: http://www.abnamro.com/), please state your question.

Yes, hi Doug.

Neil Carter from ABN. I just wanted to ask about the fixed income platform. That seems to be a much tougher and slower burn, than you initially anticipating.

Who do you think is really doing it in that market? You know who do you see as the kind of the most successful? And what do you think you can learn from them? And what can you do rekindle -- get that business going?

Our original -- hi Neil.

Our original business plan, you know contemplated Instinet fixed income hitting break even in the second half of '03. That was really, you know, what we have said. Liquidity businesses take quite a long time to grow.

Two -- and as Mark alluded to earlier, the volumes are starting to grow at Instinet and you know, some of the deals we were alluding to earlier, I -- you know look quick promising.

The -- there are a number of players in that space. The biggest one would be

.

the consortium of investment banks is in that space. And you know, some of the voice brokers are still around.

But you know, our view has always been there will be two to three winners in the fixed income liquidity pool space. We can't envision a world where there will not be a fixed income market place, with the trading of you know liquid and semi liquid fixed income instruments.

You know we feel have a good chance. But, there are some competitors out there, ahead of us right now.

OK. Thanks a lot.

Amy Beautte, of Bear Stearns, please state your question.

Hi, Doug and Mark.

Just a follow up, can you just talk about the specific items you take out, to get to that 14 cent number?

The restructure costs which were pretty small in the fourth quarter. I think about a million-and-a-half. We've taken out of there, our investment gains which are much more -- let me just pull it out here, which are $17.9 million.

And we've taken out -- we have an unusual item in there, where we've actually recovered a little bit more from our insurance on the September attack, than the cost of that to us. So we have a small gain from that in the quarter.

So eliminating those and the tax specific on those results in a residual 14 cents down from the 18 cents.

So if we just take out those first three items and then plug the tax. Do you have that specific number?

the one that comes out of revenue. And then, what comes out of pre tax income are again the investment gains, the restructure and the insurance. And the tax impact, it's a -- a lower tax rate on the investment gains.

And this is where we have investment, write-downs in the third quarter which structured a number of our investments in the corporate ownership of them, and lowered tax jurisdictions and we're able to have our operations which are predominantly here in New York.

So we have a bit of a lower tax rate on those. And there's -- there's that element of it.

OK. Thank you.

You're welcome.

At this time, there are no further questions. Please go ahead sir.

OK. Thank you very much.

I believe that will conclude the call today. And we look forward to talking to you again, next time. Thank you very much.

Thank you.

Ladies and gentlemen, thank you for participating in today's conference, you may now disconnect.

END