納斯達克交易所 (NDAQ) 2002 Q4 法說會逐字稿

Good day.

This is Kara.

I will be your conference facilitator.

There will be a question and answer period after the remarks.

I will provide further instructions before we take questions.

I would like to turn the conference over to John Pitt, VP of investor relations at Instinet.

Mr. Pitt, you may begin the conference.

Good morning.

Welcome to Instinet Group's conference call to discuss fourth quarter results.

We apologize for any inconvenience caused by our rescheduling this event.

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 the statements.

You can find the detailed discussion of several important factors that could cause actual results to differ materially from our expectations in our quarterly report on form 10-Q for the period ended September 30, 2002, and other documents filed with the SEC which are available on our website.

Reconciliations to US GAAP of non-GAAP financial measures referenced in this call if any are set forth in the earnings release distributed today.

Or will be made available on our website.

I will now hand the call over to Ed Nicoll, Instinet's chief executive officer.

Ed?

Thank you, John.

Thank you.

Good morning.

I'm Ed Nicoll.

With me today is John Fay, the Instinet CFO who will review the company's fourth quarter and fiscal year 2002 results.

Also with us today is Jean-Marc Bouhelier on the phone from our London office and here in New York is Mark Nienstedt.

I would like to offer overview results, provide an update on the integration effort and some recent product and service highlights, and then offer brief commentary on the challenges we face in the coming months and what we are doing to position ourselves for long-term growth and profitability.

First, with regard to the key points from the year-end financials.

Instinet reported today a net loss of $735 million for the year ended December 31, 2002 or $2.71 per share on a fully diluted basis compared to a net profit of $145 million or 63 cents per share for 2001.

For fourth quarter of 2002, Instinet reported a net loss of $112 million or 34 cents per share.

Excluding investment gains and losses, restructuring costs and discontinued operations of pro forma operating loss for the fourth quarter 2002 was 10 million dollars or three cents per share.

John Fay will discuss the items in more detail in a few minutes.

I would like to offer a few thoughts on the numbers.

Our business is dependent on overall trading volumes.

As most of you know we have had a continuation of very weak overall market volumes.

In three decades in this business, I'm hard pressed to recall such a tough market environment in both the United States and around the world.

Compared to last year's fourth quarter, U.S.

OTC average daily volume was down 12% and compared to third quarter, it was down 5%.

Outside the U.S., we've also seen weak market volumes which have had an effect on the international businesses.

A declining unit prices in our core markets have had an even greater impact on our business than these declining market volumes.

In the fourth quarter of 2002, our revenues per 100 shares were 18 cents per side, down 70% from Instinet's stand-alone price of 61 cents per side in the fourth quarter of 2001.

To look at these numbers in more detail, it's important to separate out the different pricing and volume considerations on both the buy and sell-side customers.

On the sell side, we have seen about an 80% decline in the unit pricing over Instinet stand alone fourth quarter 2001 level.

Off setting this decline somewhat has been a 27% increase in sell side volume including both Instinet and Island in both periods.

On the buy side, year-over-year our revenues per 100 shares are down 27% in the fourth quarter, 2002.

This decline is exacerbated by a drop in volume of 11% over that same period.

On a positive note, our buy-side volume stabilized in the second quarter of 2002 and has remained stable since that time.

As I previous announced, we are also aggressively bringing down our cost base and remain on schedule with our comprehensive rescheduling plan to reduce our cost by $100 million on an annualized basis which will result in a more leaner and more efficient company.

As we move ahead with this cost reduction plan, one of the highest priorities will be to realize maximum value from the Instinet Island integration and on that front I am pleased with our progress and initial results.

To that end, following the completion of the Island acquisition, we identified three key goals for the overall integration effort.

First, to achieve significant cost savings including the approximately 100 million dollars restructuring plan, second to integrate as quickly and seamlessly as possible personnel facilities and key technologies and third to communicate these initiatives as clearly as possible to our employees, customers and shareholders.

Several key initiatives are already delivering strong results.

On January 10th, Island converted all of its trading activity to Instinet clearing services platform.

As a result of this initiative and savings from associated sources, we expect to save about 20 million dollars this year.

In terms of facilities, we're on track to reduce the occupancy costs and perhaps most importantly with regard to the integration of the Instinet Island matching engine, our technology team continues to make steady progress in delivering greater value.

Clients have access to both Instinet and Island order books and benefit from enhanced interaction of the two liquidity pools.

In January, Instinet routed approximately 23 million shares a day to Island.

Let me also highlight a few other recent accomplishments in the products and services category.

Instinet Trading Portal, our new front end trading application deployed at over 600 Instinet client sites by the end of the fourth quarter.

Portal now contributes approximately 20% of the order flow.

Newport (ph) our global portfolio trading and execution management solution continues to make significant and impressive progress.

I am pleased to report that Newport deploys at 50 client sites in the U.S. and Europe by the end of the quarter, an increase of 38 on the previous quarter's total.

We ourselves have installed Newport throughout our organizations to manage the execution of our customer care orders around the globe more effectively and efficiently.

Before turning the presentation over to John Fay, let me say a few words about why Instinet's business model remains robust and highly competitive, especially given the emerging structural trends in the marketplace.

In brief, we are a pure unconflicted agent for our customers, completely focused and dedicated to helping our customers execute their trade.

While other business makes similar claims, Instinet has a value-added proposition than just neutrality.

Not only do we hold ourselves to the highest standards for unconflicted professionalism, we sit both literally and figuratively at the heart of the largest aggregate pool of OTC liquidity and a growing list of liquidity pool in the U.S.

At the nexus of a global execution network with access to 40 securities markets around the world.

We then harness this unique position to provide a range of electronic services customized to our customer's needs with whatever level of human support is necessary.

In other words, our insight and expertise in the marketplace flow directly from our combination of professionalism, superior liquidity, state of the art technology and global execution infrastructure.

That's why our customers can count on us to be knowledgeable and trustworthy partners completely focused on the trading needs.

I also believe that current market trends will put a growing premium on this sort of service.

As market structure has changed, especially in the U.S., institutions have found it increasingly difficult to execute blocked trade.

As trading increments have diminished, spreads have diminished but so too has quoted depth.

Many institutions have responded by holding more of their liquidity in reserve than slicing that liquidity into smaller displayed lots and using portfolio trading and rule-based trading in an effort to lessen market impact.

Our opportunities in the months ahead will be providing institutional customers with precisely these sorts of customized products and services, combined with our superior liquidity and trusted trading expertise.

Seen in another light, we offer a strong economic solution to asset managers looking for the right trading infrastructure and network to help them lower their overall business costs.

Specifically, our global reach, state of the art technology, breadth of product offerings, trading professionalism and our agency only business model make increasing economic sense to institutions who would be forced to build or buy many of these capabilities at a much higher cost at the very time that market forces are putting increasing pressure on their bottom line.

In closing, let me say that as increasing numbers of transactions are handled electronically, more and more customers, especially the rapidly growing segment utilizing sophisticated algorithmic trading strategies will demand the most efficient, technologically advanced marketplace.

That's the future of trading and that's where Instinet will lead the way.

Just before turning to John, I would like to recognize the contributions that Mark Nienstedt has made to the organization.

We announced yesterday that jointly that Mark would be stepping down from his role as president.

But Mark will continue to favor with his presence here at Instinet.

We'll benefit from his many years of experience.

From his advise he'll remain on the board and remain an adviser to me and to John Fay over the next year.

Now, I'd like to turn the call over to John Fay to discuss fourth quarter financials.

Thank you, Ed.

Good morning, everyone.

I'm John Fay, Instinet's chief financial officer.

I'd like to go over the fourth quarter results and we'll discuss overall market volumes and trends.

Our business revenue drivers and then specifically talk a bit about our revenues and expenses.

I will take your specific questions during the Q&A session later in the call.

As Ed stated earlier, our net loss for the quarter was $112 million compared to net income of $46 million in the fourth quarter of 2001.

On a pro forma basis, excluding non-operating charges of $62 million for restructuring, a 20 million dollar write down of our equity investments, and the effects from discontinued operations, we lost $10 million in the fourth quarter which equates to three cents per share, compared to a pro forma operating net income of $3 million or a penny per share in the third quarter of 2002.

We have been and continue to operate in very challenging markets.

OTC market trading volume a primary driver of of our volume was 1.6 billion shares per day in the fourth quarter of 2002, which is down 12% from the fourth quarter of 2001 and down 5% from 1.7 billion in the third quarter of '02.

Over an a year over year basis, OTC trading volume is 8%.

On a monthly base, the OTC market averaged daily trading volume weakened as the quarter progressed and continues to decline in January and February of 2003.

Both of which have historically been very strong months for market volumes.

For example, OTC market trading volume is 1.4 billion per day, 1.5 billion per day in January, 2003 and only 1.3 billion thus far February to date.

These numbers are significantly below even the recent trends and will affect our revenues going forward accordingly.

In this difficult environment, we have been successful in rapidly growing our volume in our market share though.

Our OTC market share is 29.7% in the fourth quarter of 2002 which is up more than one third from the fourth quarter of 20301, including both Instinet Island and the prior period.

The 29.7% is down slightly from 31% in the third quarter of '02, again as if Island and Instinet have been combined.

The growth in our market share came from our broker deal sell-side customer base as Ed just discussed.

I'd like to spend a moment on market share.

There are many factors that affect our market share including the volume our customers execute in our marketplace, actions by our competitors and overall market conditions.

We have not as of this date seen a material change in our volume or our market share as a result of the introduction of the Nasdaq Super Montage System.

We attribute the small decline in the market share in the fourth quarter versus the third quarter primarily to overall market conditions, including higher than normal program trading in the third quarter, particularly in July as a result of Worldcom, as well as seasonal fourth quarter weakness in our volume due to our client mix.

However, we do operate in a very highly competitive environment, and I would urge caution to each of you against extrapolating long-term trends about market share from the short period of data that is available to us currently.

Just turning to our volumes.

Our U.S. equity trading volume was 575 million shares per day in 2002.

This is down 12% from 654 million in the third quarter, on a pro forma basis, and up 17% from a pro forma 489 million in the fourth quarter of 2001.

The decline in trading volume versus the third quarter was due to the lower market-wide trading volume, our lower OTC market share which I just discussed and the decline in our ETF volume.

On a top line basis, our revenues in fourth quarter were 267 million dollars, up 5% from the third quarter of 2002, but down 23% from the fourth quarter of 2001.

Our total net transaction fee is 168 million dollars in the fourth quarter of 2002, were level compared to 170 million in the third quarter of 2002 as the inclusion of Island, our fourth quarter was offset by the 12% decline in our share volume.

And weaker volumes in revenues from our international businesses.

On a positive note, I'd like to say that our LGR (ph) subsidiary which provides commission recapture services had a record year in both volume, revenue and profitability in 2002.

Our average net transaction revenues per 100 shares were 18 cents per side in the fourth quarter of 2002 which is consistent with our expectations, and down from 25 cents per 100 shares in the third quarter.

Due primarily to the inclusion of Island for the entire fourth quarter.

I'd like to turn to expenses.

Our expenses in the fourth quarter were $372 million down from $823 million in the third quarter of 2002.

The third quarter include the large charge for the goodwill impairment.

Our pro forma operating expenses which equals (inaudible) less soft dollar and commission recapture expenses and broker dealer rebates and one-time items such as goodwill and restructuring were 204 million dollars in the fourth quarter of 2002, which is 14% above the comparable $179 million in the third quarter.

This 14% increase was due in large part to the inclusion of Island for the entire fourth quarter of 2002.

I'd like to note as we integrate the two businesses and teams it becomes less relevant to look at Islands separately.

As I explained the remainder -- ( Inaudible ) give you an indication of how to view the expenses going forward as the entities continue to be integrated.

In December we announced an integration plan to reduce our cost by $100 million on an annualized basis by the end of 2003.

We recorded a $62 million restructuring charge in the fourth quarter as part of this plan, which is slightly higher than $58 million we disclosed in our December press release.

The restructuring charge consisted primarily of costs reducing our head count about 300 employees, 17 percent of our work force and cost related to consolidating our office space in the NY metro area to reflect these fewer employees and integrate Island.

We told you in our third quarter earnings call that the operating expenses for the combined company would be $800 million which is the starting point for the $100 million cost reduction plan.

The components of the $100 million cost savings plan are as follows.

About 60% is related to compensation and benefits.

Approximately 20% is related to brokerage and exchange fees and approximately 15% to occupancy and lease hold improvements.

The remainder of the 100 million dollar cost savings plan is other expenses primarily communications costs.

I'd like to note that a majority of these cost savings were realized in FY '03 and that other than a pro rata portion of the comp and benefit savings, they were not realized or impacted in our fourth quarter results.

We are on track to achieve much of those savings.

We have reduced the combined head count by a net 250 employees in the fourth quarter, we have achieved the targeting clearing saving to the January migration of Island's clearing to Instinet's in-house service and we have reduced our space footprint while actively marketing excess space.

The final component relates to reducing our communications costs, savings for which we won't see until later this year.

Now, I would like to review some of the specific expense items for the quarter.

Compensation and benefit expense of $61 million in Q4 2002 is down 5% from the third quarter of 2002.

The decline was attributable to reduced compensation and benefits related to the reduction in force, partially offset by the inclusion of Island to the entire quarter.

We ended the fourth quarter of 2002 at 1474 full-time employees down from 1723 in the third quarter and down significantly from 2300 on a pro forma combined basis at December 31, 2001.

The first quarter of 2003 will have a full quarter's impact of significantly all the reduced headcount.

Over the next several quarters I expect our compensation and benefits per average employee to be in the range around 155,000 dollars per person.

Brokerage clearing and exchange fees were $37 million in the fourth quarter of 2002 which is down 12% from the $42 million we reported in the third quarter of 2002.

As higher costs from the inclusion of Islands volume was more than offset by lower volume in Instinet and Island and reduced regulatory fees.

As I noted earlier on January 10th, Island transition is clearing to Internet's in-house clearing firm.

We expect to see an additional 10% decline in costs going forward, given current volume and mix in brokerage clearing exchange fees related to the efficiencies from this integration.

I would like to caution you that there are significant political and regulatory initiatives under way by our competitors that could increase these costs to us.

These issues include trade reporting and regulatory cost allocations.

Communications and equipment expense of $37 million increased $10 million from the third quarter of 2002, due to accelerated charges associated with our migration of clients off our proprietary in-house high speed network and on into the Radeon (ph) Network as well as the inclusion of Island in the fourth quarter.

We expect to continue to incur higher Radeon (ph) charges over the next two quarters as we migrate off of our proprietary network.

Depreciation and amortization costs were $25 million in the fourth quarter of 2002 which is up from $17 million in the third quarter of 2002.

Due to the additional amortization of purchase intangibles from the Island acquisition and accelerated amortization of lease hold improvements resulting from our consolidation of office space.

Other expenses of $17 million increased $7 million dollars from the third quarter of 2002 due to $4 million of additional bad debt expenses for the full amount of past loans made to strategic partners, and the inclusion of Island for the entire fourth quarter.

In the fourth quarter we recorded net investment losses of $20 million.

This includes a 4 million dollar gain on the sale of our Toronto's Stock Exchange shares subsequent to its de-mutualization (ph) and $24 million of write down to our investments in W.R.

Hambrecht, Archipelago and Nasdaq.

We reviewed our carrying value of these investments and the value of the investments in light of the market conditions during the fourth quarter and marked them appropriately.

As we go forward in this difficult trading environment, we remain focused on delivering value-added products and services to our customers to grow our business and our revenues, and we look inward to control our costs and manage our cash balances.

We think we have a very strong balance sheet.

Our net cash balance at the end of the fourth quarter was approximately 600 million dollars.

And in the current environment, we are producing cash flow from operations.

Our cash balance is down from approximately 800 million at the end of the third quarter.

The results of the special 250 million dollars dividend we paid which was partially offset by movements from the cash in the settlement activities.

At this time, I'd like to hand the call back over to John Pitt, our head of investor relations.

Thank you, John.

Now we'll turn the call over to Q&A.

Operator, we are ready to take questions.

Thank you.

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.

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Questions will be answered in the order that they are received.

When at it is your turn, I will call your name.

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Begin by stating your name and then your question.

You can withdraw your question at any time by pressing the pound key.

One moment for questions.

And our first question is from Richard Repetto (ph) of Putnam Lovell.

Hi.

First question is to Ed.

I know you have been focusing on getting out aggressively and meeting clients.

Just trying to see, you know, what was the think thing that, you know, hang home to you that stood out the most?

And then now where you're going to move your focus to or, you know, now after getting out there as much as you did over the fourth quarter?

Well, Rich, I think -- I tried to reflect that in my prepared remarks.

I do believe that will there are tremendous opportunities for us out there.

I think that there's -- first of all, there's a real need for the services that we deliver.

I think our institutional customers are -- are facing very difficult market conditions and at one time facing complexity in the task of executing the trades.

At the same time that increased cost at the same time that they are under a tremendous amount of pressure to -- you know, with respect to their bottom lines.

I do think there's a tremendous opportunity for us to step up to the plate and, you know, and help them to meet their needs while reducing their cost at the same time.

I think we are sort of uniquely situated in order to do that.

You know, if you think of our position we are -- you know, we are the trusted third party.

We're never trading against our customers.

We're in a position where we, you know, can garner our customer's trust because, you know, we are never going to duplicate their trading strategies or engage in activities which can compromise their positions in the marketplace.

And I think we are uniquely situated to help them to at one time face the increasing complexities that they face at the same time reducing their costs.

I think in addition to that, just overall general frustration a clear complaint and consistent in the U.S. about the quality of executions that they have experienced on the New York Stock Exchange, and there's a tremendous opportunity for us to step up to the plate and do more trading than in the past.

So I think lastly I think that both domestically and internationally the last thing I would -- you know, of course the -- I had many conversations with customers with the last impression I got was just a tremendous opportunity for us to step up to the plate with Newport.

And to serve many of their needs with that.

It is a product which is -- which has received good reviews from all the customers that I talked to, and seems to put us right in terms of the sweet spot and where we need to be to serve many of our customers needs.

So I'm pleased to report that we are poised into, you know, to get -- you know, a significant market penetration of Newport.

We have found it to be tremendously helpful in managing our own trading operations an we have gotten tremendously positive feedback from customers both in the U.S. and around the globe in terms of its applicability and attractiveness to meet their needs.

Ed, you mentioned one point on the listed opportunity, and with Nasdaq volumes, at least down cyclically, you know, hopefully, and I understand Jean-Marc has been talking to investors and speaking about the opportunity, how do you see breaking in, at least one person that we talked -- one expert in the field thinks that the only way the ECNs will get an opportunity to gain meaningful share would be at the trade per rule is rescinded by the SEC.

I mean, do you see the ITS changing or any of the market structure rules changing to allow you to deeper penetration in listed volume?

Well, I mean of course we are for a regular -- what we would describe an enlightened regulatory environment which will allow us to compete side by side with the New York Stock Exchange.

Whether that involves repeal of the trade through rule or some more nuanced compromise where you would have a deminimus exception like you do in ETS or have a trade through rule, one proposal recently was to -- was to enforce a trade through rule only for markets which offered immediate exemptions and allow market electronics to bypass marketplaces were there were significant delays in executions.

The problem with the trade two rule is that it requires us to deliver orders down to the floor and slow down our marketplace, basically to that which is operating in the -- on a floor-based environment.

And of course the heart of our competitive advantage is the speed, the immediacy, and the flexibility that an electronic marketplace gives us and forcing us into the -- you know, into the floor-based model really reduces our competitive advantage tremendously.

Now having said that, I think there's a lot of progress that we can make short of significant regulatory, you know, change, but over the long run if we're to be a serious contender and competitor to the New York that we will need some kind of regulatory relief at some point.

As we increase our market share.

Okay.

Just one last quick thing.

On the numbers.

And on the expense side, you know, Instinet had pulled what they turned the fixed expenses out.

You know from their earlier restructuring.

If you look at the fixed expenses this quarter, they were 166.

You pull out Island, you know, what you say in the press release is 15 million, gets you to 1 -- you know, 151.

That's still a pretty good increase from 137 just in the prior quarter.

So just trying to see, you know, if these expenses are fixed why, you know, we have seen the bump up quarter-to-quarter, and that's my last question.

Thanks.

Rich, I think that if you go through the components of those expenses, you will see that we described significant depreciation and amortization, primarily related to the acquisition of Island.

As well as additional amortization of lease hold improvements due to our cost restructuring plan, and I think the other component that you will see is the higher communication expenses which we discussed.

We have got some period of transition as we migrate our clients from our in-house network on to radiance.

Okay.

Thanks.

We can talk about it more off life.

But thank you much.

Thank you, Rich.

Thank you.

Our next question is from Charlotte Chamberlain.

Please state your name and company.

Hi.

Charlotte Chamberlain with Jefferies.

I apologize cause I had to jump on the call late, so maybe you covered this.

The Nasdaq announced that their pilot program that started yesterday that would allow non-market makers to post limit orders in Super Montage, and I was wondering what you expect the fallout to Instinet and other ECNs might be from that.

And if you anticipate any price reaction to that.

And then finally with the announced -- with Archipelago's announcement that they're going to leave Nasdaq, if you're expecting any kind of price cuts when Archipelago does leave in order to attract volumes there?

Thanks again.

Bye.

I'm a little nervous about this, because you know Mark is in our London office.

And I'm not even sure he's on, but --

I'm here.

I'm here.

Would you try and take a crack at responding to some of that?

Yes.

I guess it's interesting we're of course going to follow closely the -- the new Nasdaq proposal to have the firms being able to access Super Montage.

I think in the early days.

I think, you know, we have been supporting those customers for a long time.

I think through the Island platform we give the best possible service.

We are looking at how Nasdaq is competing with us.

But it's sort of early days for us to draw any conclusion.

The second thing I would say where Nasdaq is opening up the platform to other segments may gave us an opportunity to talk to some of the traditional constituency of Nasdaq about doing more business with us now that Nasdaq seems to be servicing not just the market makers but a wider community so may be we may lose on one side and gain on the other side but we just need to monitor the situation.

As far as pricing is concerned, we obviously cant figure out what our competitors are doing, but you know our perspective at the moment is that whether its Archipelago, or ERST (ph) or Nasdaq, I think everyone feels under a fair amount of pressure to bring some profitability to the business.

I would be quite surprised actually if significant players like Nasdaq and Archipelago are going into another round of pricing at this point in time.

But again, this is a situation that we will monitor and difficult for us to comment on what our competitors will do.

I think it makes more sense for smaller organization to maybe try to use that as a way of gaining market share which is what we have seen with the next trades and those people.

But I think that ARCA and Nasdaq and Instinet needs to make money and at this point in time, I don't think pricing is what's going to make us win or lose.

Yeah.

I mean, from our perspective, you know, we really see what Nasdaq is doing with the pilot program is yet another price cut because by giving these firms who didn't have access to Super Montage that access it relieves them of the expense of either going through Instinet or ARCA to post on Super Montage.

It allows them to do go directly and bypass that cost so it is a price cut.

But those firms almost never use us to post on Super Montage.

Actually, if you think of that -- the older firms, when they post from Island or Instinet, they match on Island or Instinet 99.9% of the time.

They almost never ramp out.

Okay.

Okay.

Well, thanks very much.

Bye.

Thank you.

Our next question is from Mike Vincequera (ph).

Please state your name and company.

Good morning.

Raymond James.

A couple of questions on just the markets in general here, as far as with Super Montage.

Can you give us an update on the issues related to your posting of quotes on the ADF and what you are seeing as far as market fragmentation.

Has it improved since Super Montage went live or are we seeing difficulty for some clients in, you know, achieving best execution for their clients?

Well, I would say that there's been an increase -- I mean, one area where it's been a lot of comment is that there has been an increase in the number of instances of locked and crossed markets.

One of the reasons for that is because, you know, we are now on separate platforms which are not -- you know, which are not necessarily routing to each other.

I mean we, interestingly enough, you know, we route the Super Montage, but for whatever reason Super Montage does not route to us.

So we have a situation in which Super Montage has created a marketplace where it doesn't -- you know, it doesn't access other marketplaces.

Whether that be Island or Instinet or Archipelago or anyone else.

So I think we have seen an additional instances of some indications or classic indices of fragmentation which would be locked and crossed markets.

Now, I would say that some of the -- you know, the issue with locked markets is simply that what you are seeing is what appears to be a locked market, what is in fact not a locked market because there are differences in the -- in the bids and offers and which are less than a penny.

But since the display itself is limited to penny increments, the -- it appears to be a locked market when in fact the participants are choosing not to cross marketplaces because they choose not to incur the sub-penny costs that are implicit in going across marketplaces.

So one of the ways that we could -- you know, that is open to the U.S. markets is to display the quotes in less than penny increments.

But that creates a lot of overhead in terms of the cost of-- cost disseminating that even many more increments than we have now.

And already we are in an environment in which ironically where we have less volume, we have a tremendous amount more message traffic that we have to negotiate.

So the cost -- one has to question the cost of displaying and communicating sub-penny increments and whether it is worth it.

So when one looks at the problem of quote/unquote locked markets, one has to view it against some of the -- whether or not the cost to solve the problem is really worth it at the end of the day.

And I think that this is something that we all have to wrestle with.

Okay.

So it could be an ongoing problem, although you don't seem to think it's a major one at this point?

Well, I don't think that our customers certainly are finding it difficult to navigate the marketplace.

There is an increasing amount of interconnectivity in the world.

I would say that, you know, that you have a marketplace in which most of the people have already bitten the bullet, and recognize that they needed to route the different pools of liquidity.

Instinet, you know, rolled out smart router almost a year ago now, and we believe that we have some of the best, fastest, most advanced routing technology in the world today.

And our customers don't see any -- we don't have any complaints from our customers in terms of being able to access the liquidity pool.

I think we have to -- you know, Nasdaq has chosen not to route.

That's a model that they have engaged in.

Island was a model in which it -- was a marketplace in which it chose not to route.

And, you know, I think that there ought to be room in the marketplace for different kinds of exchange models.

But that's something that, you know, that the regulators have to deal with.

: Okay.

On a separate matter, on the comp per employee I think you said it was $155,000 would be your estimate for comp and benefits per employee annually.

That struck me as a high number, but what's compensation versus the benefits piece of it, and can you compare that over on a year over basis to give you what the average comp was in light of the cost cuts you have gone through?

Mike, it's John Fay.

I think if you look at our historical trends per employee, the $155,000 is significantly lower than it has been in the past.

You know, we look at our benefit costs of being approximately 20% or so of comp and benefits.

As a rough estimate, if you'd like to talk further about how that looks going back, I'd be glad to do that with you.

No.

That's sufficient.

On portal and Newport, when you talk of your customer ads and your installations, can you help us understand, how many of your clients using those systems were using previous Instinet systems and how many are either new customer ads or customers that were , had dropped the use of your services previously that you have regained because of the new systems?

Well, I don't think -- you know, I'm not prepared to answer that question because I don't have the numbers in front of me.

I would say that we are -- you know, in a position where there's a mix.

Jean-Marc, do you want to tackle that?

I don't know whether you have data in front of you?

On which part?

The question was how much of Newport and Portal is going at the new customers and how much is basically replacing the old technology to assisting customers?

Is that fair, Mike?

Yes, it is.

I would say that -- I would tell them the Newport front its probably -- it's probably more than -- it's probably between 50 and 70% new customers.

On the Portal front, it's probably around 30%.

Now, some of that is actually recapturing customers that we had lost.

You know, in the Newport front, you know, we used to have a platform OMS which I guess ten years ago was probably the leading edge trading -- list trading platform.

And I know people like Quantex (ph) and people like Flextrade (ph) and people like Morgan Stanley with TraderExcel (ph) came out with their product, you know we lost customers and what we are seeing is the customers are coming back and using us again.

On the portal front, we have two types of customers.

We actually have brand new customers which did not have a relationship with Instinet and that's probably about 50 to 100 customers.

And then we have customers who continue to have a relationship with Instinet, but had decided to move their trading to ARCA (ph) to a B-Trade or other players.

Because of two things, I guess one, is they thought the technology was better and because we did not have a tiered pricing tiered pricing decided that, you know, they would continue to use Instinet for free and post trades and for difficult trades, but following the business they were better off trading on the new technology at a lower price points.

Thank you.

That's helpful.

Thanks, guys.

Thank you.

Thank you.

Our next question is from Charles Peacock (ph), ABN Amro.

Good afternoon.

I have a couple of questions, first is on the non-US transaction volumes in Q4.

We saw a sharp reduction from previous quarters.

I was wondering if you can elaborate on what's been going on there.

And whether this is purely a reflection of what is happening in the market?

But I think we're looking at something like a 45% reduction versus Q3.

Well, I think we've -- we're first of all, very, you know, willing to, you know, to concede that the market environment in Europe has been -- especially in Europe has been extremely difficult.

And, you know, we have been impacted by it significantly.

You know, I don't have market share figure to give you, so I'm a little hesitant to talk without precise facts.

But our overall impression and mine in terms of my visits to customers is that the decline that we have experienced is basically in line with the environment that we face.

Jean-Marc who is in our London office can probably add some color to that.

Yeah, I mean, I was looking at the numbers yesterday.

One, I don't recognize 45% down, but from market perspective, I think the market turnover in Europe in the third quarter was around 29 or 30 billion a day.

That's adding all the European markets we trade in.

I think if you look at the first quarter, we had one month at 29, one month at 26, one month at 22.

So effectively there was a significant decrease of market turnover, and my sense is that the market share remained about flat.

But the -- you know, our revenues are decreased at the same time that the market was decreasing.

And, you know, unfortunately the early part of the business was much better.

Right.

Okay.

And the other question was just on the cost side of the business.

Which I was wondering if you can repeat what the starting point was for the fixed cost reduction to the combined companies.

And secondly you talked about the increased cost in communications of the Radeon (ph) migration.

And whether those -- then falling away after the next couple of quarters, falling past the 100 million targeted savings.

Charles, it is John Fay.

The starting point for the 100 million dollars cost savings is the company's third quarter run rate is if they have been combined, and the third quarter conference call they went through, it's 800 million was if you took Island's remerger and added them to Instinet's third quarter, you would get 800 million.

So the 800 million comes off that.

Right.

On your second question, as to the higher communications costs, I mean, there's two things driving the 10 million dollar quarter-over-quarter increase.

First is the fact that Island is included for the entire fourth quarter.

And then the second is we've had experience and will for the next two quarters approximately higher charges from Radeon (ph) as we pay for our own proprietary high speed network to support our clients and have costs to transition them to Radeon (ph).

So in the first two quarters of next year, I would expect the communications and equipment expense to not -- not to decline significantly.

I see.

Can you quantify how much those additional costs are?

I don't think it's appropriate to go into that in more detail.

Okay.

Thank you.

Thank you.

And our next question is from Daniel Goldberg (ph) of Bear Stearns.

Good morning.

Good morning.

Just a couple of quick questions.

First, I know you touched on it during your prepared comments, but the revenue capture per share clearly down significantly 28% quote over quote or something like 70% year over year.

I want to get a sense for where you think that could be leveling off or how we should think about that going forward.

As this number continues to decline?

Well, I think we are generally pleased with the experience over the last few months, but we are very cautious about it.

We're going to defend our market share.

I mean, you know Charlotte asked for instance if that's going to be an increasing -- you know, price competition, and it's not going to come from us.

But at the same time we'll defend our market share.

So I'm a little hesitant to say that the decline is over and that we're going to be able to arrest that with certainty.

We -- you know, we will defend our market share at the same time we will not -- we do not believe that there's sufficient profitability in the business.

That warrants -- nor do we believe there's elasticity that warrants any further increases in prices.

In fact, we are looking at ways to make sure that we -- that the business is possible, and this we have a reasonable return on our investment in the business.

So overall, I would say that we are hopeful and that there's been certainly over the past quarter, there's been real firmness in -- generally in the pricing and, you know, we are hopeful that the vast majority of that kind of -- of, you know, of competition -- price competition is behind us.

We have seen some of the smaller ECNs continue to try to gain market share by, you know, price competition, but we haven't seen any impact on the business from that activity.

Because we believe that the quality of the services that we provide and the value that we provide in terms of our network far exceeds the slight benefit that the customer could get by going to one of the networks.

So the implicit cost of trading away from our network is much greater than the explicit savings that ECNs offer.

So the real question is what is going to be the price posture of a larger players, and it seems like we hit a real point of pain here and that there has been some stability in the marketplace over the last few months.

: Okay.

Great.

The second question was it seems like the average trade size decreased about 19% quarter over quarter.

Any particular reasons driving that?

Well, Daniel, I think you're seeing the impact of Island being mixed into the Instinet's business for fourth quarter.

So the 500 or so is a better run rate than what we were seeing, about 700?

I would caution -- I would say that there has been a general trend towards a smaller trade sizes everywhere.

There's trend for instance on the New York Stock Exchange towards smaller trade sizes I believe every year over the past few years.

The statistics that I looked at for instance, showed the average trade side was down in the 500 range in December.

And, you know, that's down significantly I think, you know, the average trade size of the New York Stock Exchange was in compared to the '90s was over 2,000 shares.

As recently as last year was in the 800 share range.

So I think some of the market trend issues that I talked about earlier are -- are, you know, the result of the fact that trades are down.

I think, you know, if you put it in a nutshell, the regulatory posture has been one in which favors a marketplace which is most friendly to retail trading.

It seems like the regulators are driven by a notion of marketplaces.

That respond to the needs and the -- the perceived desires of the retail trading community, and so essentially what we have, you know, I mean to put it in a nutshell the institutional traders trying to disguise their trades to look like retail trades.

Making them smaller and smaller effectively through technology.

And that's a -- just a natural reaction into the market structure changes over the past few years.

So you would say it's reason to believe go with the 569 versus what we were seeing, 700 going forward?

Yeah.

I think that our customers would love to see -- I mean, the -- you know, I can tell you that actually our order size from our institutional customers year over year is actually up, but our execution size is down.

And I think that's a direct function of the changes that are going on in the marketplace.

Okay.

And on the expenses, other expenses were up you talked a little bit about it, but any sense there, any guidance you can give us?

It's been kind of all over the place, many different things going to that.

But any guidance you could help us out with there in terms of going forward?

I think Daniel, I said that the of the 17 million, 4 million was additional bad debt for the full amount of past loans made to strategic partners.

So I don't -- that's not a recurring item, of course, so, you know, I was just cautioning you that there were lots of things that move around a little.

But if you look at that 4 million dollars as a one-time item, it is probably appropriate to think about it that way.

Okay.

Then do you have an end of period assets on the balance sheet?

End of period assets on the balance sheet?

I do have that.

We'll dig it out.

Thank you.

In the meantime, why don't we go on to the next call.

Operator, we'll take the next question.

Yes.

Our next question is from Jamie Rome (ph) of Wellington Management.

Hi, gentlemen.

I had two questions for you.

The first is what is Reuters position with Instinet, what are their long-term plans?

Do you see it as an independent company or do they see it as a long-term significant holding of their business model?

And then secondarily, who are your one or two greatest competitors as far as setting marginal prices right now in the marketplace?

I think the -- I think that the first question is better asked to Reuters.

And, you know, they own 62 some odd percentage of our stock, I believe.

And they are -- and we treat them as a valued stockholder.

I think, you know, with respect to who is -- you know, I mean we have two sets of competitors.

One broadly speaking -- one is that sets our rates on the sell side with our biggest competitors would be Nasdaq.

By far.

Below that would be Archipelago.

On the -- you know, on the buying side, we -- our range of competitors goes from ITG which is closest to our model to -- you know, to the some of the people on this call, Jefferies & Company and to all of the bulge bracket firms.

But are those people that you have just mentioned setting the marginal price where there's been all this price pressure, and how much pain can Nasdaq take?

I mean, are they in a position where they could almost take this indefinitely?

Well, I don't know if they're in any more position than we are in terms of pain.

Because we have -- with respect to our sell side, you know, business, we are -- you know, significant part of our revenues are coming in from our -- from our buy side business and we believe that our liquidity is important in terms of serving that buy side business.

We are in a position where we believe we can defend that pricing on the sell side as long as we have to.

Nasdaq on the other side has listing and market data revenues I think the listing revenues are, you know, are stable and attractive.

The market data revenues are not necessarily, you know, going to stick around.

If they don't -- you know, if they don't continue to control a -- you know, a significant percentage of the stocks that they trade.

So I think -- I don't know which direction that cuts.

I think you'll -- you're in as good a position as I am in terms of what Nasdaq's -- you know, stomach is in terms of price competition.

You know, I think it's not well recognized that at the beginning of the price competition occurred when Nasdaq set super sized pricing at ten cent rebate and 20 cent takeout.

Which at this time actually was lower than what Island was charging at the time which generally seemed to be sort of the -- you know, the low-cost party on the scene.

So, I mean, I didn't quite know, you know, whether I'm in a better position to judge Nasdaq's strategy than you are.

I'll leave that to you.

In terms of buy side competition we have, you know, competition from Archipelago and competition from ITG and competition from other sort of smaller agency broker dealers who tend to be more I think -- you know of the marginal price setters.

You're right, than the major firms.

But it's hard to identify a single party.

And in the current modeling of your business which I'm sure you have to do at least with some expectation just like semiconductor companies have some expectation for price declines, do you get to the point where you're going to be able to stabilize the profit level and generate a reasonable cash flow and profitability?

Is that going to be something that you expect to see some time this year?

Well, we have refrained from, you know, from making any projections at all or for giving guidance or forward looking guidance at all.

We of course -- obviously are very focused on achieving profitability.

And we are obviously very concerned as we mentioned in -- as I mentioned right off the bat in terms of unit pricing.

And what we believe that we need to do in order to retain that pricing is to deliver value to our customers.

So I think the thing that we're most focused on is in serving our customers needs and delivering value added product to our customers.

We are doing that, we feel like we are -- you know, we have made significant progress in that regard.

And we will continue to do so.

We have -- one of the interesting things that I think, you know, that you need to understand is that our -- you know, our buy side business has been pretty stable in a very difficult market environment.

And we're very pleased overall with the results of our buy side business.

And this result -- that comes from the fact that we've delivered out new front ends to those clients to meet their needs, and we've -- you know, we have strengthened their liquidity pool so that, you know we actually deliver value to them.

They -- the issue that we have is in making sure that we can justify our pricing to them, and that it's beneficial to do business with them, beneficial to them and that there's real value in the services that we provide.

And we look at those services in -- you know, in terms of a different segments that we serve.

I mean, generally speaking, there are four broad components to what we do.

We match I know on our most fundamental level, we match customer buys and sells and that's our ECN does.

Next up the value chain we route not only to our own ECN and liquidity pool, but to liquidity pools in the U.S. and in 40 markets around the world.

And that infrastructure that we built is a significant competitive advantage to us, and does give us a -- you know, a varied entry.

It's not easy to build a global execution network as we've done.

Thirdly we offer, you know, what amounts to electronic trading tools to our customers.

Newport and Portal certainly are the most visible of those, and lastly we offer traditional sales trading support to customers that need that.

So there are four different levels of service that we provide to our customers and we believe that we can price to those four different levels the services and add value at -- and we must add value in order to justify those prices.

So with while we focused on improving that value proposition to our customers, focusing on what our customers wants and what creates value for our customer what we are most focused on internally is in controlling our costs and making sure that we're cash flow positive.

We're pretty convinced that we can do both of those things.

Okay.

Thanks.

Thank you.

And our next question is from Marie Murphy (ph) of Lehman Brothers.

Hi, thanks.

I have a couple quick questions that are more income-statement related.

First one I know the investment losses were certainly more than we were anticipating.

Are there any, you know, potential writeoffs?

I know Nasdaq is Mark to market, but are there any other significant potential writeoffs that can be looming?

Then going back to the soft dollar and the rebate line item, is there any target of percentage revenues that you're targeting there?

Then lastly on the cost side, you mentioned 155,000 per employee.

Should we be looking at this as a fixed cost then?

What degree of variability should revenues exceed expectations or fall short?

Okay.

Let's take those into order.

First the investments.

You know, we have to look at the valuation of our investments under accounting principles based upon their value.

To the extent they have a market value, Nasdaq does we market.

Right.

In the sense that they're privately held, such as Hambrecht and Archipelago, we have to look at the significant events to see if their valuation has changed.

So at the end of the fourth quarter, I think compared to the third quarter we saw a significant change in the equity marketplaces and in the securities business, and they warranted a write down.

Now, we have -- I think we have about 45 million dollars left on our balance sheet for these strategic investments.

Okay.

And so that's a starting point going forward and we'll look at them at the end of next quarter just like we looked at them right now.

If you say of the 45 million, is the majority of that equity trading type related investments?

I think this will be disclosed in the 10 K. If you go to our Q, you'll see the percentage.

I think Nasdaq and Archipelago, [inaudible] of that total.

Okay.

Your second question on soft dollar and rebates, you know, those numbers have moved around a bit as percentage of revenues.

Mostly the changes in revenues and volume due to the inclusion of Island.

So we don't offer forward looking guidance and I would say that the best approximation of that is about where it is right now.

Okay.

The rebates are driven by the sell side volume.

Then on the third -- your question about comp and benefits you know, one of the earlier questions was that the 155,000 dollars seemed high.

I mean, a portion of that comp and benefits relates to commissions.

And our commission pool is driven in large part by our revenues.

Another large component of that is our bonus plan and our bonus plan as I said again is driven in large part by our profit and revenues with ceilings and floors.

So that number will move around as our revenues and results change.

The 155,000 that I had given out I think is a good number in a range that will move slightly up and down.

Okay.

Thank you.

Did you answer the last question?

The total assets?

Yeah.

Daniel, the total assets at the end of the period were 2.3 billion.

I think we're -- are we at our last question here?

Yes.

Our final question is from Chris Castanza (ph) of Deutsche Bank.

Hi.

I'm calling for Glen Shore (ph).

A previous caller had mentioned the decline in non-U.S. transaction volume.

I was wondering if you can provide some collar on why non-U.S. revenue per trade on the other hand was up approximately 53%?

I'm not sure where your -- where you're getting your up 53%.

I think the previous number in the decline in international volume and revenues was incorrect.

I think in the third or fourth quarter period we saw about a quarter -- or 25% or so decline in our international revenues which Jean-Marc -- as Jean-Marc said is roughly approximates what happens in the markets in Europe and Asia.

In the third quarter.

In the fourth quarter.

So I'm looking at net transaction fees from non-U.S. equities?

It appears that was down approximately 14.5%?

Am I looking at the wrong line?

In our press release, you're looking at our disclosure of net transaction fee?

Right.

Right.

Showing that net down 14.5% it appears that the transaction volume on the other hand was down 44%?

If you like, we can talk about that.

I don't see where you're getting the 45% decline in transaction and volumes.

So it would be helpful if we went through the numbers that you're looking at with you.

Absolutely.

We can do that off line.

The numbers are that in terms of our fees, you know year over year we're down 25% and quarter over quarter about 14%.

Am I --

Right.

Absolutely.

We'll we have to take this off line.

I'm not familiar with the numbers in terms of the transaction volume.

That's fine.

Thanks, guys.

Operator?

Yes.

I'm show nothing further questions.

Thank you.

That concludes the Instinet's fourth quarter earnings call.

The webcast of the call will be up later today.

And we'll post the transcript approximately by the end of the week on our website thank you for participating.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation an you may disconnect at this time.