納斯達克交易所 (NDAQ) 2002 Q3 法說會逐字稿

Please stand by.

Good afternoon. My name is July and I am your conference facilitator. After the speakers remarks there will be a question and answer period. I would like to turn the call over to John Pitt, I will provide detailed instructions for how to ask questions. I would now like to turn the call over to John Pitt, VP of Investor Relations. Mr. Pitt, you may begin the conference.

Good Afternoon and Welcome to Instinet's group's conference call to discuss third quarter earnings. During this conference call we may make statements that are forward looking in nature. Our actual results may be different from the result anticipated in the statements. You can find a detailed discussion of certain important factors that could cause actual results to differ materially from our expectations in our annual report on form 10-K for the year ended December 31, 2001 and in other documents filed with the SCC which are available on our website. And now, I'll turn the call to Ed Nicholl, Instinets' Chief Executive Officer.

Thank you and good afternoon. I'm Ed Nicholl, CEO of Instinet. With me today is Mark Nienstedt, President and CFO who will review the company's 3rd quarter results. Also with me is Jean-Marc Bouhelier, Instinet's Chief Operating Officer who will discuss some key products and services and update you on their roleout (ph). For my part I would like to share with you my perspective after three weeks on the job and offer some preliminary thoughts on the company's future direction. Let me first discuss some highlights from third quarter financial. Instinet reported a loss of $2.05 per share, Including a rather substantial 552 million dollar charge for Goodwill and Airmet (ph). On an operating basis excluding net investment result, restructuring costs and goodwill impairment, and the related tax effect, Instinet earned one cent per share. Mark Nienstedt will outline our third quarter results in significantly more detail in a few minutes.

Next, let's turn to the business environment we're facing. As many of you know a core part of our business is dependent on overall trading volumes. Which have been sharply declining over the counter market volume. Year to date OTT(ph) market average daily volume of 1.7 billion is down 11% from 1.9 billion in 2001. Despite this environment have achieved higher trading volume from our cell site customers. But our more profitable by-side volumes to the extent OTT volumes continue to be weak and it will continue to negatively impact our business.

Recently also, heightened federal regulatory scrutiny of market structure issues affected our business. In response to some much these Federal regulatory matters and in order to best serve our customers Instinet (inaudible) have made difficult business decisions that resulted in declining volumes and lower price points in some parts of our business. We intend to compete aggressively while meeting the commission's requirements. That is SEC requirements. To that end we are engaged in ongoing and productive discussions with the commission.

Given the launch of NASDAQ super montage' yesterday, let me also say a brief word about our company's competitive position in this new market structure. While it is way to early to predict long term result, given Instinet and (Island's ph) market share and the fact that both companies so frequently drive the quote by being at or better than the national best/better offer, we are confident we can compete effectively outside the NASDAQ framework. In today's overall business environment, it's more important than ever to reduce our costs in order to bring greater efficiency to Instinet. As we look at ahead to achieving that goal and serving our customers two priorities will be paramount. First we're absolutely committed to achieving cost synergy from the Instinet island combination. At the time of the merger, we identified cost synergies of approximately $25 million per year. We're thoroughly reviewing the company's entire cost structure and will have more details soon. At this time, I can say that we expect to achieve substantially more than the $25 million per year.

The total cost synergy should fall in four areas, technology, clearing, facilities and compensation. In technology we are working to rationalize our trading platforms and infrastructure over the long term and adopt superior technology solutions that will be low cost and robust. We'll deliver to our customers the technology solution reliable, scaleable and highly efficient. In clearing we expect to move to Island's (ph) clearing to Instinet in-house clearing facility. At the facility we intend to rationalize office space. In terms of compensation expenses we're reviewing headcount structures across the company to produce a leaner and more efficient structure. Our second priority is to realize as much benefit as possible from our two liquidity pools and from complimentary customer bases. Instinet has set the standard for providing its customers with value added tools to execute large orders while minimizing market impact. With the benefit of two liquidity pools, the island customer base will have a chance to interact with this Instinet liquidity. In return, the Instinet customers will have the opportunity to interact with the extra liquidity from Island. In the first two weeks after the closing of the merger, the latest period for which we have disclosed data, Instinct's and Island's the two liquidity pools average 34% of the over the counter market. This liquidity obviously means we can offer our customers better execution opportunities. It's worth noting in this context for August 2002, the most recent month for which figures are available, the combined share volume handled by NASDAQ, (inaudible) and Select Net was 26% of the O.T.C. market. In other words, the liquidity of Instinet's 2 ECNs (ph) offered 1.2 times the liquidity of NASDAQ's own system. That allows us to deliver real value for our customers.

Before closing, I want to briefly comment on the continued progress we're making on rolling out some key products and services to our customers. Jean-Marc Bouhelier deserves tremendous credit for aligning our organization with client groups and making sure each group has the tools to compete aggressively for customers. Especially on the buy side with such products as Instinet Trading Portal and Newport (ph).

As some of you know the Instinet Trading Portal is our new order entry and smart routing system developed over the past 12 months on an accelerated schedule to replace legacy technology and reduce deployments (ph) cost . It is quickly found market acceptance and rollout is well ahead of schedule.

Newport (ph) is a sophisticated patent pending system for portfolio trading it's aimed at passive and index managers, which was introduced, in the first half of this year. Its installed base doubled during the third quarter. It is used extensively on Instinet's global portfolio trading.

To sum up, even with today's tough business conditions and the competitive landscape Instinet is in a strong position. We can be and we intend to be a low-cost producer in the markets in which we compete. In some of our businesses that's a longer-term goal. But in the business that accounts for the majority of our revenues and profits that is serving buy and sell side institutions in the domestic over-the-counter market, that is a readily achievable near-term goal given our market share and our determination to quickly rationalize our cost structure. Armed with that advantage we need to be relentlessly focused on serving the needs of our customers to be successful from the top and bottom line perspective. I would now like to turn the call over to mark to review the 3rd quarter financials.

Thank you. This is Mark Nienstedt, Instinet's CFO. Our result for the third quarter was significantly impacted by goodwill charge. Before discussing our recurring business revenue and expenses I would first like to review that goodwill charge.

As many of you know goodwill is an intangible asset arising at the time of an acquisition. It is the excess of the purchase price of a business over the net value of the identified assets acquired. This year the accounting rules that cover goodwill were substantially changed. In the past goodwill was amortized over an estimated life. Goodwill's no longer amortized but remains on the balance sheet indefinitely subject to a periodic impairment test. It is this impairment test that led to the charge we have taken. As a first step, the new accounting rules indicate that a business consider that goodwill may be impaired at the company's total market value falls below the net book value including goodwill. The decline in Instinet's share price from $6.52 at the end of the second quarter to $3.10 at the end of the third quarter, Instinet's market value did fall below its book value. We have therefore determined that we needed to perform the next step in an impairment test.

In the second step we performed the detailed review of the company's tangible and intangible assets. In this process we used the services of independent valuation experts. Based on this review, and the application of the new accounting rules for assessing impairment we determined it is appropriate the full amount of goodwill on our balance sheet be impaired resulting in a pretax charge of $552 million. Accordingly, our September 30, 2002 balance sheet now includes no good will.

I would like to again point out that this is a noncash charge and does not impact the operation of our business. In fact, our balance sheet remains strong. Even after the goodwill breakdown and the special dividend. Equity is approximately 1.09 billion dollars. With $3.30 per share with a post dividend net cash of $570 million., $1.73 per share. Now, I would like to turn to a review of our operating financial performance. We completed our merger with Island on September 20 and our financial results and the operating statistics reflect the consolidation of Island's figures for the remaining six business days of the quarter. In connection with this transaction, we recorded $74 million in identified intangible assets primarily on the core trading system. These intangible assets will be amortized over their estimated useful lives.

At current volumes, Island adds $80 million in annual net revenue and $20 million in brokerage and exchange fee expenses. Island also adds $50 million to our annual fixed cross base exclusive of intangible amortization with a little over half of that being compensation and benefits. This yields a current pre-tax rate of positive $10 million from Island before intangibles and before synergies. Intangible amortization is expected to run at an annual rate of $50 million for the first 18 months then drop down to $10 million annual rate fully amortized.

In the first quarter, Instinet continued many of the trends seen in the last quarter. Our combination of system performance, functionality and low price has led the continued growth in our U.S. market volumes led by the volume growth in our (inaudible) customers. Our NASDAQ market share, total US market share reached record level of 20.5 percent and 11.1 percent respectively in the third quarter. Since the Island transaction our NASDAQ volumes have exceeded 30% of the total NASDAQ volumes.-

Our strongest growth has come from the low priced (inaudible) group averaged net U.S. cents per share has averaged $25 cents per 100 shares in the quarter compared with 36 cents per hundred shares in the second quarter. Since our combination with Island we are averaging19 cents per hundred shares per side. We have excellent revenue mix with about 57% of our net US transactions based on institutional customers in the U.S., Europe and Asia. 39% from U.S. broker dealers and the balance from professional individuals. In non-US equities, our business has held up well in the summer months, up slightly from the second quarter. We have continued to manage our expense-based down lowering compensation tools lower average stock values resulted in the sequential decline of $7.2 million in compensation and benefits and all other components of our fixed cost base by a total of $18.7 million. We have significantly exceeded our previously announced goal of reducing our annual fixed costs by $120 million from year-end 2001 levels. We expect further significant cost synergies to come but will not be forecasting a specific number at this time. )) I would like to turn the call over to Jean-Marc Bouhelier.

Thanks. On the product front I'm happy to report that we're ahead of target with all but two of our new products. Trading portal and Newport. Trading Portal was deployed at client side by the end of the 3rd quarter. It contributed to approximately 20% of Instinet's US institutional business. We're expecting over 400 installations by year-end. Which compares favorably with our initial objective of 150 customers for the year. (Inaudible) in the US and Europe. We're still on target to have Newport in use at 50 client side by year end. Between Newport and Portal 25% of our US institutional volume is being processed which compared to 15% in the third quarter and 5% in the first quarter.

The business environment remains challenging in the fourth quarter. (Inaudible) form the traditional asset manager was particularly week, specifically through August and September. The changing our business makes significantly reduced our (inaudible) cents per share transaction fees. On the positive side, our market share and volume in all other client segments were still showing strong growth which we believe is a dire consequence of our current align strategy and our increased performance in our new products.

One of our top priorities is to realize as much benefit as possible -from our combined liquidity pool. As a first step in our combined liquidity, we'll as of the 22nd of October (inaudible) expose our customer's orders to the combined liquidity pool of Island-Instinet. That means when the order is placed with Instinet it will pass through our smart processor looking for professional matches within the Instinet and Island liquidity, which represents about 30% of the (inaudible) market within the next 60 days we'll look at implementing the next phase of integration, which will allow more seamless interaction between the two (inaudible). I would like to answer questions now. )) Operator we'll turn the call over to Q. & A. ))

We'll begin the question and answer segment of this conference. If you have a question now in you or any time during the remainder of the call touch the number one on your telephone keypad and listen for a tone. The tone indicates your line has been placed in the queue to have your question answers. When it is your turn I'll call your name. If you are using a speakerphone please pick up the hand set before speaking. Begin by stating your name then ask your question. You can withdraw your question at any time by pressing the pound key. One moment for the first question. The first question comes from Colin Clark. Please state your name and then ask your question.

Hi, Colin Clark from Soloman, Smith Barney. On the standalone basis can you provide us with Island's revenues and expenses for the third quarter and how much Island contributed to Instinet's financials revenues and expenses for the quarter?

Ya, hi, it's Mark Niedstadt. Colin, Let me say for the third quarter we included Island's revenues and expenses for just the six business days that occurred from September 23 to September 30. It has a relatively small net profit in the period. But it was not significant to the overall result of company. We're not at this point going with a quarterly financial for Island for the third quarter so substantially most of that quarter wasn't part of the consolidated business. Their volume figures have been posted on their website available to everyone. If you look at the currents run rate on revenues and expenses I am given a sense of where that is currently that's adding to our business and that's not substantially different from wait was in the third quarter though they had a few exceptional items in the third quarter as they were preparing themselves to complete the merger with Instinet.

Ok. How many employees were brought over from Island? And what is Instinet's current head count?

We disclosed our current head count on a table at the end, it's 172, and I believe employees have come over from Island. It's around 17 -- 22 or 23 -- we were 15 at the end of the second quarter with 1723 on a compliance basis including 172 from island.

Can you update us on the issues surrounding Instinet's participation in super montage? As I understand it, you are quoting on the ADF now. Anything to add in terms of super montage participation?

Not a lot. We started to quote in the few stocks on super montage on ADF. We didn't get a headline with it going without a glitch, but it did. )) Island is quoting on Cincinnati and will continue to quote on Cincinnati. It's just too early to draw any conclusions about super montage at this point.

Thank you. ))

Our next question comes from Adam Townsend. Please state your name and ask your question.

Hi, it's Adam Townsend from J.P. Morgan. Mark can I ask to you to repeat the breakdown of U.S. share volume and trade volume by broker (ph) institutions?

I don't believe I have given it in breakdown by volume. There is some revenues stats between broker dealers and institutions that are contained in the earnings release. The volumes are substantially made up of broker dealer volumes at a relatively low price. When you look at the revenue base it's more related to the institutional side even on our combined basis. But certainly for the third quarter. And I have those figures on a revenue and relative percentage on the earnings release.

Ok. Can you give us a color on your expectation with the full consolidation of island how that dynamic may evolve?

From a financial point of view? Is that your question? ))

That and sort of volume mix. Trying to get our hands around the composition of --

How to look at the business going forward?

Right.

)) I think if you take a look at the facts that we presented which are the run rates on Island for both the revenue and a cost perspective and taken the fact that we have stated that our combined business is now averaging about 19 cents per hundred per side, you can pretty quickly take the volume figures that we put out there weekly and translate them roughly into revenue from our US business which is the majority of the business and get a read where we're from a revenue perspective and what we said on the cost where we're for synergies. I think we'll expect to come out and paint a much more colorful picture on the ability to bring down the complaint come client expense base. But you can take the fission that are there and get an idea where we're almost on a week-by-week basis by tracking volume figures.

Ok, that's fair enough. ))

You need to keep in mind that we're harmonizing the -- the pricing and that will happen almost on the same day that we start connecting the books in a more seamless way than we're now. And that will have a positive impact on the average daily pricing. And it won't be significant, but it will be some change. ))

Right. That's a good point. Thanks, Ed.

On the international landscape, what you are seeing and where you are in terms of operations over the last couple quarters. You closed down some of those operations. Where does the activity stand today and ways the business environment like out there that you are seeing?

)) From a financial point of view, the revenue has remained pretty good over the summer. So I think we have been -- continue to be well received in the marketplace. We're up a little bit from the second quarter. We have taken down our costs when you refer to ought cost reductions on the international side because we closed an office in Australia some time ago. We reduced business this year as -- income business which was largely based in Europe as well as the U.S. So from a financial point of view we don't have a significant change here in the third quarter. You want to talk a little bit about that Jean Marc?

)) I think that I'm pleased with our performance in Europe. If you think about it one of the big difference between the U.S. and Europe is we collect our revenue in basis points. It's a strong declining market and some very slow customers in the traditional asset mergers. We managed to maintain our revenue and grow slightly this summer which I think is a sign that we're getting market share. But that's our current assessment of our position in Europe is we seem to be, we seem to be finding customers more receptive to our offer to fairly lean agency brought here with the right technology around this.

Very interesting. Good, thank you, guys. ) )Operator: Our next question comes from Daniel Goldberg.

Daniel Goldberg, Bear Sterns, Good evening guys. First question is just a follow-up in terms of the revenue capture erosion. It was down 31%, quarter-over-quarter 64% every year and combined Island-Instinet at 19 cents per share. Where should we look at that going? I know you were kind of hinting it might be getting a positive uptick. But where can we forecast that going forward?

I would say we're not going to offer a forecast other than to say this. We have a mix of business that reflects a pricing that we think have come to after sort of a long process of having some different prices. We also have a business mix, in fact cents per hundred that I indicated that fully reflect the combined businesses of Instinet and Island, on going institutional business and the broker business we have in the U.S. So there is nothing in our guidance or what we have to say at this point which would lead you to believe that we are pushing that in one direction or the other. And I would think that it's in that neighborhood that you would want to hold your view on pricing and with something different.

Second of all, I apologize if I may have missed some comments in the beginning of the call. But did you make any further comments on some of the management changes recently announced with Matt leaving and who will be taking over his role? If you have comments on that that would be appreciated.

We were not making any announcement at this time.

Ok. And then I guess it's finally did you talk anymore about the $20 million write-down investments? I know you mentioned ARC (ph) in the release. What was that related to and are there any other pieces we should be aware of?

We took the portfolio of investment in nonpublic companies. It's been a difficult year for everybody and we continued to be very aware of the need on a continually review the carrying value of these investments and reflecting what we think the market reality are where we don't have an external bench mark of a public share price. We've looked at that. The quarterly performance reflects a write-down of our investment. We also hold shares that in some publicly traded exchanges or that way we'll put to the market on and we have done that. They could come down as well. Some of you have been -- exchange exchanges not dramatically but the cumulative impact on the quarter was $20 million. When you look at our investments, our total investments line in that area, I'm trying to pull it out here to give you -- it's not a significant piece of our balance sheet now. So while there has been volatility, there is not a large potential for any downsizing. Our investment at September 30 would be $65 million in total in that category.

Ok. Then one final question. On the E.T.F. announcement with Island in terms of losing some of that business is there further comment or anything around that in terms of the impact of that on the business?

Well, Dan, it's Ed Nicholl again. It's important business to us. We were disappointed having to make at changes that we did. But we found it necessary as a result of the regulatory environment. And the, you know, we're absolutely committed to working with the S.E.C. to find a solution that allows to the end quote and display if that's possible. It's a difficult issue for, I think, for us all right now. Our success in the E.T.S. is forced the issue about this how you reconcile electronic markets and traditional markets. And I'm not sure that we found a solution that's satisfactory to anybody and we would like to, you know, to find a solution that allows us to be in the quote. So at this point where we're at there is not a lot to say. I don't have a grand plan to announce that will resolve these issues for us. But I will tell you that, you know, that we're competing in that marketplace. We still retain a significant share of the E.T.F. volume. And we hope to find a solution that allows us to operate so that we can publish our quote in the national market at Island and so we can remain in that and publish the quote in Instinet. And we would -- I guess I would caution everybody not to -- I know this has been sort of a matter of great interest because I think it's -- it's sort of at the heart of the intersection between new markets and old markets and because we're all in the same business. So it's an interesting problem. But I would caution everybody to put it in context in terms of our old growth business and how much of our revenue this impacts. ))

Thank you.

Our next question comes from Richard Repute. Please state your name and ask your question.

Uh yaw, Rich Repute, Putnam Lovell, NBF. Mark, I'm trying to get my arm around the expense situation here a little bit better. We talked about or you talked about the $120 million in annualized fixed expenses. Decreasing. If I go through the numbers these fixed expenses right now, 3q 02 versus 4q down 44 million or so. You know just from you alone, and then we haven't included even if it is fixed days of Island, you have 50 million of expenses there. Say 9% of island. I'm just saying have you really overshot the mark on the expense cut?

Not overshot the mark. Factoring in the addition of fixed cost basis comes from Island. Let me make sure I'm clear with you on that. If you take a look at where our expense base is in the q3 and the figures out there be the fixed expense base we exclude three variable areas of the rebates, the product costs we take out of our revenue when we look at our revenue. But also brokerage, clearing and exchange fees. We had a dramatic drop in that cost base the third and fourth quarter of last year to the third quarter of this year. If you look at that drop and annualize it is he in excess of $120 million. But it would be -- I'm not trying to indicate that that is going to achieve -- also considering the $50 million cost basis from the Island transaction itself. ))

I guess maybe it's a matter of interpretation. Have you outperformed our cost saves that you previously announced -- I interpreted the $120 million to be about $30 million per quarter. Is that correct?

Yes.

So 3q versus 4q of last year, fixed costs expenses that I'm coming up with are down about 44 million. ))

That's correct.

So you have significantly outperformed that 30 million saying we're 44 down plus expenses of 10% or so of Island.

Yes, we have.

Ok. Then can -- on the compensation can we take one line and sort of walk through -- it looks like you didn't decrease head count that much at Island -- at Instinet. When you go through the numbers here. Was there an across the board salary cut?

We were about 71 million dollars in quarterly comp benefits in the second quarter and just under 64 million in comp benefits in the third quarter. We had a fairly significant reduction during the second quarter so our average staff count for that quarter was higher. During the third quarter we did not do another reduction but we were at a lower level than where we were at when we entered the second quarter so you have the impact of a lower average during the quarter. In addition we looked at the levels of incentive compensation that relate to both revenues in some groups and profit that relate to other groups and have accrued for the existing people at a lower estimated rate where we'll be for a full year and that's also contributed to that decrease. So you know I think that's something that you have to understand as you look at our result. And any other company going through a period where incentive comp costs is significant portion of the comp benefit lines that you have got to take that into consideration and I think a little bit of that in consideration mitigates the fact that our fixed costs drop is so dramatic off the fourth quarter of last year that a bit of that is also need to be looked at as the reduction in the incentive accruals being down. We were together same thing last year. Although we were doing the same thing at the end of last year we had the accruals higher and as the year went on we took them down.

Ok. I applauded you on your cost cutting. The last question. Ed on the E.T.F. Is there any other solution to getting trading of the E.T.F.'s? You said you still have market share. But I don't think that's the case with the spiders. You are drop trading in those. Is there any solution other than the rule change or regulatory change to get you back in the game and if it is a regulatory change is there anything on the horizon that would point to that coming out sooner rather than later? ))

Rich, again I just want to -- I know this is an interesting subject and again I want to caution you and everybody else to put this context. I'll be happy to talk about this. It's a fascinating subject, I could talk about it for days. But I don't want the length of the time that we spend on this to reflect the importance of this to our market.

What is this note you are handing me here? I can't read it...the ETF volume since we started our call market has been about 10 to 15 million (ph) shares a day and the financial impact of that is just not material. But we are going to compete for it and we're -- and we're very much see this as a loss to our business and something we want to get back. Now having said that, you know, it's a simple, at the end of the day it's simple. There is a rule that says that when we exceed 5% market share for the preceding six months that we basically have to, the S.E.C. that taken the position that Ticks (ph) that allows us to participate in the national market system and we have to participate in I.I.T.S. When we participate in ITT when our costs basically when we deliver and order down to the floor, you know -- down to the, floor, when we interact with the floor with respect to trade through we essentially our customers are giving the people on the floor a free 30-second option. And our customers don't want to expose their order to parties that they basically see as competitors. So our customers have a significant problem in delivering their order flow to a mechanism that send their order flow down to what they believe is and advantaged player in the marketplace.

If you look at our position and you take a worst-case scenario in Island we were coursing along at 35% market share. We have been anywhere between 20% and 25%. That 10 percent that we lost is that order flow which wants to interact in an environment in which they can see the bids offers. But that order flow, which we retained, is that business that does not want their order flow to be exposed in a situation in which the floor has a 30-second option. Those are difficult decisions for us. We understand the regulatory imperative and what the commission is trying to do. We understand our responsibilities and we take them seriously. But we also understand the demands of our customers and what services that they desire. So there isn't a magic bullet in terms of finding a solution. We'll -- we'll try and as best we can see if there are ways we can participate in the international market system so our quote its available for everybody to see. We're advocates of transparency and we're chagrined where we're in a position where we're providing and opaque marketplace for our customers. We will work through this and we'll perhaps try to experiment if we can with certain of these issues, certain of these listed issues and see if our customers can find ways to interact with these traditional floor bases. Obviously we'll advocate as strongly as possible that the traditional markets not have this advantage. Especially in E.T.F.'s where it is not much of an excuse in terms of price discovery. When you send an order down to a listed environment in which you are trying to find the correct price for I.B.M., one could make the argument that the market should slow down to do the kind of manual price discovery that occurs down on the floor. But there is no analogous argument on E T.F. because there is intrinsic price at any one time and there is no need to slow the market down to do this kind of price discovery. We're looking for solutions, we're trying to advocate on behalf of our customers and trying to find the best posture we can in order to have a viable business at the same time, meet the strictures of the national market system.

Great. Thanks for the answer, Ed, thank you. ))Operator: Thank you. Our next question comes from Matthew Owen. Please state your name and ask your question.

Could I just ask to you clarify the revenue flow if you adjusted for the lost days in the third quarter last year?

Last year as I recall, and I don't have that information here, we lost 5 trading days we came in instead of 64 we went 59. So one way -- we had 64 and it would have been we can do 64 over 59. What we have shown in the third quarter to do that adjustment.

How much cash are you now carrying?

)) We're carrying over $800 million we'll show on the balance sheet of September 30 of net cash. We're holding $249 million for dividend that was sent out on October 3rd. So subtracting out that cash flow for the dividend. We're looking at $570 million. or a buck 70, or two bucks seventy three a share of cash.

Um, can you retrieve that cash carry (inaudible) further or is that the minimum you need for liquidity?

)) That's not minimum. We operate a fairly broad base that uses -- makes use of a good solid balance sheet in its operations. And I think up on a cash flow point of view, if operations are profitable we would be in a positive cash flow. But we haven't done that calculation of every dime you take out of the business if you wanted to do that.

Could I ask in relations to the Islands Integration we have seen the end of the restructuring of the core. What restructuring costs will Island demand?

That's part of the whole integration that we're working on. I think it sort of as we look at the whole organization now and it's going to be hard to separate out the Island and the Instinet fees specifically that way. But we'll have cross savings and the charges will be well worth it in terms of what other companies and what they can achieve and what the cost is. I think we'll demonstrate a good ongoing cost savings at reasonable charge level.

)) Can you give us a feel for is it going to be $20 million more or less?

)) Savings?

)) No actual cost of realizing those savings.

)) We don't have those figures that we'll go through today.

)) Thank you very much.

Our next question comes from Mike Lipper. Please state your name and question.

Good afternoon, gentlemen. It's Mike Lipper. I understand that the international meeting, the non U.S. equity increases its share of the total because of it increased its market share and the markets were depressed in the U.S. Looking out to whatever you want to consider a normal year, what share of your total revenues do you expect to be in non-U.S. equities and also what is happening to the average size trade in the non-U.S. equities.

Mike, let me answer your question in this way. If you look at the figures we disclosed in our earnings release we show net revenues of related to U.S. equities the net transaction fees related to non-U.S. equities (inaudible) . When you look at third quarter you can see the proportion between the two. In fact the third quarter in the non U.S. grew slightly from the second quarter and the US decreased slightly. (problem with audio) Consider that as we add Island in it's an entirely U.S.-he can which city-city-based revenue. So you can assume a quarterly. $20 million and you'll get a rough proportion of U.S. and international business. We think we go pretty -- we have good opportunities in U.S. equities and non-U.S. equities. We're not predicting one will have a more significant growth rate than the other at this point in tile. We have -- we think both markets are sputtering at moment. We can get poor performance benefit from market recovery both in and outside the U.S. )) The average side trade? )) It has declined outside the U.S. 80's has in the U.S. We had -- we don't do a revenue is not -- our charge to our customer is not a cents per share it's a (end of problem with audio) percentage of value. So as we have declining value in trade, you know that's been sort of the unit of measure there as well. And our style of trading in some ways is encourages people with blocks (ph) to get it done over the course of the day. . Thank you.

Our next question comes from Ed Chen. Please state your name and question.

How is it going? Just had a quick question. In looking forward to super montage, can you give us a sense of the percentage of volumes from direct connection into your system and Island's as compared to volumes coming in through the NASDAQ system?

)) It's somewhere south of five percent. The Internet is probably around four and I think the island number is like 1.5. So my guess the average for the combined is probably between 3% and 4%. Coming from NASDAQ and the balance is all direct. ))

And those are percent ages of your NASDAQ volume or percentAges of overall volume.

Percentage of NASDAQ.

And can you also aside from the E.T.F.'s can you update your listsed business and what trends you is seeing there?

I guess from I don't have the combined number, but I can give you a sense for the -- Instinet trend. Our New York business number of share credit was up 15%.

Ok. That's excluding E.T.F.?

That's including E.T.F. who were up 15% from q3. Which should have brought us back to almost a level where we were in q-1. We almost within a percentage of when we were in q-1.

Then final question, when you are gays look to integrate with the smart writer, the order flow from the two E.C.N.'s Presumably some of the volume your doing is not from the display order book but it's from limit orders and that sort of thing, can you give a sense how big that number is and how that might impact your combined volumes?

I don't think we have that information at the moment. But our expectation is that -- most platforms have limit orders which are displays and as we get the two platforms to interact we have to expect that that will create more opportunity for our clients to get their orders filled. It's difficult to predict what that number is going to be. But I guess October 22 we'll get the beginning of financials (inaudible) next quarter we will be able to give you a better status as who how much liquidity we're able to provide our customers.

And one housekeeping question. The numbers that you report on your website in terms of daily volumes do those include the Island volumes as well?

They include the island volumes beginning September 223 when we have done it and we eliminated any account for trade that would have originated in Instinet that executed on Island. Ed Chen: So that's true for the daily -- if I pull up the daily up INS for Intel that would be true there as well?

The daily numbers would not be inclusive. ? )) The weekly number is included. The combined liquidity. The daily number will still display the Instinet.

Thank you. ))Operator: Our next question comes from Glen Shore. Please state your name and ask your question.

It's Glen Shore Deutsch Bank, HI. ) Quick followup on the harmonizing of the pricing between Instinet and Island. I just wanted to clarify when is that and what is the charge for taking and the rebate for adding liquidity charge going to?

What is the actual date.

October 22 is the date Island price schedule goes to it's current 1911 to subscribers to 30 cents per hundred shares to remove with a 20 cent rebate at liquidity. ))

Correct me that's in line with NASDAQ's current? ))

Well, you mean ))

In the spread. Unknown: You mean super montage? ))Glen Shore: Correct. ))Unknown: I think they are 1020. -- 10-20. Spread wise its (inaudible).

In terms of the A.D.F., the original functionality was unsatisfactory to you and many participants and I kind of agree with you there. I'm just curious, has anything changed? From will still disadvantages from a pricing end or structural connectivity standpoint and are there still conversations with the S.E.C. or improvement happening behind the scenes that we don't see?

I'm not sure to what extent -- ))

Will were three issues. Number one was the A.D.F. had a very proper protocol of the people who could connect to it.. My understanding talking to the NASD and the (inaudible) team is that they we actually issue a new protocol which would be totally fixed compliance by the middle of November. That will make it easier for people who decide they want to use it, to use it to publish their quotes. The second problem was pricing. How much do you charge for reporting,etc. As you know the A.D.F. is free for three months and we're in active dialogue with the A.D.F. being the largest customer on what would be a sensible commercial relationship between us and them. And you know so far the indication is that they are willing to be commercial and willing to compete with the other markets. The this, you was access. But you know, my view is that access is interesting but as we said before, 96 or 97% of our volume is accessed directly by our participants. So whereas we would love more adf to provide -- we don't see that as a significant problem at this point.

I agree with you there. . Maybe a two parter to finish off. Would you disclose the volume (inaudible) ? In the past it's been between 70% and 80%. If I remember correctly of total volume. Is that still stand or did it go up this quarter given your large increase in market share?

The percentage of our volume for customers is higher in the third quarter than it was in the second quarter. Not dramatically so but the trend does continue could that business grow at a faster rate than our by-side business.

Right. Is that above 80% or would you rather not comment.

Above 80 %.. )) Glen Shore: So here is the final question, is -- how serious of a threat should we take -- the NASDAQ talks about a lot of different things, some happen, some don't. How serious of a threat do we take NASDAQ deploying direct access to the buy side, which is your basic stronghold customer base? Is that anything you are hearing -- ))Unknown: I think you can look at all those things in two ways. You know when someone else decides to do something that you are already doing you can see that there is (inaudible) -- if NASDAQ were to decide to provide direct access to the buy side, I think it would actually challenge for us because in a way one of the criticisms I think with Instinet is the fact that people were providing access to the buy side. We have seen a marketplace at the same time being a competitor. I personally would like nothing else than NASDAQ to get into that game and see how they define themselves as marketplace and competitor. We have been doing that quite successfully for a number of years. So I think if more people were to move to the same kind of strategies, it may turn into favorable for them. \ )) It would raise significant problems for other people who have seen NASDAQ as, you know, a marketplace that they own and certainly would never provide access to outside customers. ))

It underscores the importance of super montage and how much it will play out. The sell side customers are providing such huge liquidity and they traditionally have come to you for their ability to hide if you will or anonymously hit or take the underside of a transaction. Super montage can give them that ananimity, all those issues are intertwined.

I'm not sure I necessarily follow your logic. Because I think first of all you are viewing the cell side as a monolithic entity. And it is hardly that. Many of the people in the past provided liquidity to Instinet are not providing liquidity. They are taking liquidity out of Instinet on the sell side are not providing liquidity, they're taking liquidity. So I'm not sure we haven't already made that transition. The distinction between an institution that happens to be a broker dealer and an institution that doesn't is at times not all that sensible in today's marketplace. So I'm not sure that the world is so neatly divided between the sell side and the buy side as your logic would require for this to make sense.

Fair enough. I think that it would be too lengthy of a conversation to break it down piece by piece. That's true. I lumped them together. I'm just trying to get behaviorally analyze the sell side in terms of the volume that reside with Instinet and we're at an inflection point where we'll see as more stocks are rolled out in montage.

The point Ed is making is that when you look at our sell side volume today you need to real size that somewhere between 60% and 75% of the sell side volume is not coming from the traditional player. The second thing you need to realize is that the people were actually adding liquidity are not traditionally a player. They moved to an agency model. In a way, that's the -- that's already a done position and when you move to a super montage or any other world, one of stopping from a position where they are significantly contributing to our liquidity we're starting from a position where they are essentially taking because we're driving the quote in a substantial percentage of time.

I don't disagree with anything you said. I guess it's just all intertwined because I think the other side of how you are driving the inside could be the same whether it be a traditional or nontraditional through the seller because there is so much volume but I agree with you. But any way, thank you.

At this time there are no further questions.

Thank you for participating in Instinet third quarter earnings call. A transcript will be available on our website within the next few days. Thank you, good night.--- 0