納斯達克交易所 (NDAQ) 2005 Q1 法說會逐字稿

Good morning, my name is Michelle, and I will be your conference facilitator.

At this time, I would like to welcome everyone to the Instinet quarter one earnings conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers's remarks, there will be a question-and-answer period.

If you'd like to ask a question during this time, simply press star and then the number one on your telephone keypad.

If you'd like to withdraw your question, press star then the number two on your telephone keypad.

Thank you.

I will now turn the call over to Miss Lisa Camp, Director of Investor Relations at Instinet.

Please go ahead.

Good morning and welcome to the Instinet Group conference call to discuss results for the first quarter of 2005.

During this conference call, we may make statements that are forward-looking in nature.

Our actual results may be materially different from the results anticipated in those statements.

You can find a detailed discussion of certain important factors that could cause actual results to differ materially from our expectations in our annual report on the form 10-K for the year-ended December 31st, 2004, and in 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 previously distributed or will be made available on our website.

I will now hand the call over to Ed Nicoll, Instinet's Chief Executive Officer.

Thanks, Lisa.

Good morning, I'm Ed Nicoll, CEO of Instinet Group.

With me today is John Fay, our CFO, who will be commenting in detail on our first quarter results.

John is in our New York office, and I am speaking to you from our London office.

I'd like to offer an overview of our results and provide updates on our business segments and issues facing our industry.

Of course, I'll also address the announcements made last week regarding Instinet Group and its subsidiaries.

This quarter, Instinet reported its fifth consecutive profitable quarter of $14 million in net income for 4 cents per diluted share.

This compares to a net income of $22 million or 6 cents per diluted share for the first quarter of 2004.

For a net income of $9 million or 3 cents per share for diluted share for the fourth quarter of 2004.

Excluding one time items detailed on the table on our earnings release pro forma earnings per diluted share in the first quarter of 2005 of 3 cents compared to 5 cents per diluted share on the first quarter of 2004 and 6 cents in the fourth quarter of 2004.

I'll remind you that all of our historical financial information has been retroactively restated to include Bridge Trading Company, which was purchased on March 31st, 2005.

Instinet Group's revenues, net of interest expense, were $316,000, down 12% from the first quarter of 2004 and level with the fourth quarter of 2004.

As you are aware, our business is directly affected by global equity market conditions.

Overall, USOTC average daily volume was down 2% from the prior year's quarter and up 6 % for the first quarter of 2004, total consideration traded in international markets, in which Instinet participated, was 14% higher from the fourth quarter of 2004.

Given the current levels of market volume, Instinet Group's business segments either maintained or increased their market share, however this is offset by a decline in revenue capture per share.

I will now highlight each of our business segments.

At Instinet, our global institutional broker, our net income before taxes was $9 million in the first quarter, down from $22 million in the year ago quarter and up from $7 million for the fourth quarter of 2004.

Instinet's market share for US equities in the first quarter of 2005 was 2.9%, up from 2.8% in the year ago quarter, and level with the fourth quarter of 2004.

Revenue per share was 1.36 cents down from 1.49 cents in the first quarter of 2004 and 1.41 cents in the first quarter of 2004.

While market volumes increased compared to the fourth quarter of 2004, Instinet's revenue capture per share decreased.

Additionally on March 31st, 2005, acquired Bridge Trading Group -- excuse me, Bridge Trading Company from Reuters.

With operations located in St. Louis, Missouri, Bridge Trading has been a well-known and competitive soft dollar institutional securities broker.

Going forward, Bridge Trading can work seamlessly in support of Instinet.

With their similar agency-only model, the combination of two companies can provide numerous synergies to our customers.

Specifically, Bridge's strong client base and expertise in listed trading can compliment Instinet's already well established pure agency brokerage business.

Instinet will have the opportunity to grow its client base, increase exchange listed trading volume, and expand its offerings to the institutional investor community.

The Bridge transaction underscores Instinet's continuing corps value proposition as an agency-only broker, which positions the company strongly in light of the changing equity market environment and increased demands for sophisticated institutional trading solutions.

In particular, we recognize that our institutional customers are increasingly looking for sophisticated and electronic trading solutions that offer access to global markets.

Instinet provides that through our proactive Smartrouting in the U.S. and Europe and with access to the Instinet's exclusive upstairs liquidity.

As a result, the Instinet helped save commission costs and implicit trading costs which can often be significant.

We also recognize that increasing regulatory and public scrutiny of trading practices has resulted in a buy side focusing more than ever on how it achieves best execution trade in the portfolios they manage.

When our customers ask for quantitative evidence of how we provide best execution, we point to recent and authoritative third party research provided by Plexis Group which demonstrates that institutions using Instinet are in a better position to receive best execution on their trade.

Indeed better than any traditional full service broker or any other agency broker.

In particular, according to Plexis' own comparison of Instinet's block executions to to those among its universe of full service major brokers, Instinet ranked number one for all block trades from 10,000 shares to 50,000 shares, from U.S. exchange listed trades, and NASDAQ listed trades.

The small trade study proved contrary to conventional wisdom that small trade size execution efficiency varies from broker to broker and that Instinet had a significant lead over almost 900 other brokers in all about you one of the three categories: Ranging from well known [INAUDIBLE] practice to smaller agencies and boutique trading firms.

We don't believe it is a coincidence that the broker who led in these rankings is the same one who never competes with its client orders.

Instinet delivers this sort of top performance by focusing on one thing: providing independent agency service with the commitment to the value, service, and transparency.

Now, I'd like to turn to INET, which is one of the largest liquidity pools in the over-the-counter marketplace with a market share of 26.3% of match volume in the first quarter of 2005.

INET's income before taxes was$10 million for the first quarter of 2005.

Up from $6 million for the prior quarter and down $12 million for the fourth quarter of 2004.

Subsequent to quarter end on April 8th, 2005, INET customer flow, coming through the Instinet Smartrouter, started to migrate to INET's recently developed proprietary routing technology, otherwise known as RASH, which stands for Routing and Special Handling.

For the same INET team that engineered the striking accomplishment of merging the Island ETN and Instinet ETN order books last year, over the past few months INET migrated over 25% of NASDAQ volume to RASH.

Perhaps most significantly this migration occurred in a seamless way from the customer perspective.

Indeed over 100 million shares were moved over to RASH on the last day of the migration without the slightest disruption in our service.

The entire INET team is to be congratulated for this accomplishment.

RASH gives subscribers access to advanced functionality including discretion, random reserve, taking and routing.

As a result of this migration, INET is closer to be fully independent of Instinet's routing technology.

INET's technology infrastructure, innovative culture, low cost structure, large liquidity pool, and first rate management team has helped to position it to remain one of the valuable ECNs in the industry.

In addition, INET plans to soon open up a data center in Chicago to provide the area's broker-dealer community with a faster, easier, more efficient access on its order book, with the high capacity this new pipe INET will allow brokers in the Chicago area to route and trade orders potentially much faster than they can currently.

Let me close by spending a few minutes on our big news of last week.

As you all know on Friday, Instinet Group announced that the NASDAQ Stock Market Inc. group had entered into a definitive agreement to acquire all of the outstanding shares of Instinet Group for an aggregate purchase price of approximately $1.88 billion in cash or $5.44 per share.

Upon completion of the transaction, INET, Instinet Group's electronic marketplace business segment will be combined with NASDAQ's current operations.

As a result, our broker-dealer customers can look forward to reaping the benefits of the combined INET and NASDAQ electronic marketplaces, drawing from the best of our technologies and customer service.

The companies other major business, Instinet, the Institutional Agency Broker, will be acquired by Silver Lake Partners from NASDAQ immediately following the NASDAQ acquisition.

Certain members of internet management, including myself, will continue on with the institutional broker.

We couldn't be more excited by this opportunity to continue to serve our institutional customers, no more determined to approve upon the service in the future.

We are dedicated to ensuring that this transaction helps our buy-side customer benefits from the institutional brokers independent and its singular focus on serving their needs.

In so doing, we will execute superior results, efficient operations, transparent fees and services, and absolute anonymity and trust.

Finally, Instinet Group has also agreed to sell subsidiary, Lynch, Jones, & Ryan, to the Bank of New York.

Until the transactions obtain regulatory approval and are closed, Instinet's business will continue to offer investors competitive and technologically sophisticated products and services and never lose site of the fact that our business is built on helping our customers achieving best execution.

And now I will turn the call over to John Fay.

Thank you, Ed, and good morning everyone.

I'm John Fay, Instinet Group's Chief Financial Officer.

I'd like to go over our first quarter earnings with you and highlight the financial and operating metrics for each of our business segments.

I would like to remind our audience that the historical periods have been restated to incorporate Bridge Trading Company, which was acquired on March 31st, 2005.

First, in the first quarter of 2005, Instinet group earned net income of $14 million or 4 cents per diluted share compared to $9 million or 3 cents per diluted share in the fourth quarter of 2004.

The first quarter net income included $3 million of investment gains and $1 million reversal of previous recognized severance expense and a $1 million in deal-related advisory fees.

If you exclude these items, and the one time items in prior periods, as detailed in the table in today's earning's release, our pro forma earnings per diluted share was 3 cents in the first quarter for 2005, down from pro forma earnings for diluted share of 6 cents in the prior quarter.

As lower expenses were more than offset by a decline in revenues.

Our gross margin, which is our revenues minus our variable clearing expenses, decreased $9 million in the first quarter, or 7%, to $121 million from the first quarter of 2004.

This decline was due to three fewer trading days in the quarter as well as declines in revenue capture per unit partially offset by higher market volumes and higher market share at INET.

Our total direct expenses of $102 million in the first quarter of 2005 were 8% lower than the fourth quarter of 2004.

Our compensation benefits expense, $53 million in the first quarter, decreased 12% from the first quarter to the lower variable compensation, associated with lower revenues and profitability and lower severance expense, partially offset by higher stock base compensation expense.

Our employee base declined to 1,029 at March 31st, 2005 from 1,049 at the end of 2004.

I'd like to note that both of these periods include approximately15 employees related to Bridge Trading.

We continue to see declines in infrastructure related expense during the quarter with appreciation and communications expense declining by a combined $5 million.

Offsetting this was an increase in other expenses to $6 million in the first quarter from $1.5 million in the fourth, which is due primarily from higher legal and regulatory accruals.

I'd also like to note that the fourth quarter of 2004 other expense number was unusually low due to favorable bad debt collections at INET.

I'd like now to turn to our segments and review the first quarter earnings and drivers for each segment.

Instinet, the unconflicted institutional broker, recorded pre-tax net income of $9 million in the first quarter, up $2 million from the fourth quarter up 2004.

Instinet's gross margin declined 7% from the prior quarter to $91 million in the first quarter of 2005.

The decrease in Instinet's gross margin was primarily a result of fewer trading days in the quarter, as mentioned previously, and lower revenue capture per share.

Our institutional revenue capture per share was 4% lower during the first quarter of 2005 than the fourth quarter, and 9% lower than the year ago first quarter of 2004.

The decrease in Instinet's revenue capture per share is due to the continued shift and mix of our business during the quarter toward algorhythmic and electronic trading as well as volume based price pressure from clients within those electronic and algorhythmic trading areas.

Next, I'd like to discuss INET, our electronic agency market place business.

INET recorded pre-tax income of $10 million in the quarter, first quarter 2005, which is down $2 million from the fourth quarter of 2004.

INET's relative performance in operating metrics were strong during the quarter with matched ADV increasing 14% to 521 million shares per day, which is due both to higher market volumes on a daily basis and an increase in INET's OTC market share.

INET's OTC market share increased by 7% to 23.63% during the first quarter of 2005 up from 24.6% in the fourth quarter.

INET's gross margin declined 12% during the quarter to 28 million as the higher daily volumes traded were more than offset by fewer trading days and lower average pricing.

The lower average pricing was due to more customers hitting the lower price volume based tiers.

Direct expenses were $18 million during the quarter at INET lower by 10 percent from the previous quarter, primarily due to lower variable compensation expense associated with lower revenues and profitability.

I would like to note that, as Ed said, due to the transition of INET off of the Instinet Smartrouter which will be completed during the second quarter, we expect INET's technology expenses to climb by approximately $3 million in the second quarter compared to the first.

I'd like to wrap up by discussing Instinet's financial position.

Our balance sheet remains strong with $843 million of net cash and marketable securities and no debt at March 31st, 2005.

Instinet Group's cash balance was down $113 million from $956 million at December 31st, 2004.

This decline was due primarily to the seasonal 2004 incident of compensation plan payments of $50 million, which were paid in February, and higher amounts of capital used in customer settlement activities during the quarter.

At this time, I'll hand the call back over to Lisa Kampf.

Thank you John.

Michelle, we're ready to take questions.

At this time, I would like to remind everyone if you would like to ask a question, press star then the number one on your telephone key pad.

If you would like to withdraw your question, press star and then the number two on your telephone key pad.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Roger Freeman with Lehman Brothers.

Hi.

Good morning.

Ed, I was wondering if you could comment at all or give us some on the auction process that you went through and maybe some flavor as to how many bidders there were and, specifically, if any of the foreign exchanges took a look.

We went through a very extensive process over a six month period of time.

And there was some foreign interest initially but it dropped off fairly quickly when -- I think people were otherwise diverted.

It was a robust auction; it was a very long process.

It was complicated by the fact that we weren't -- we're not a pure -- I take it your interest is -- you know, in whether Deutsche Borse, or others like them internationally were involved, and I think you have to understand that it wasn't a pure play for us.

There's a lot of difficulty in terms of getting the deal done.

There were a lot of tax issues which complicated it.

But I can tell you it's a very, very long robust auction process which involved a lot of people, a lot of books were sent out.

There were an awful lot of articles.

As Bob said, I think in the press conference on Friday, the worst kept secret on Wall Street and there was -- we spent a lot of time and a lot of effort with a lot of people going over the numbers..

Okay.

And, John, I guess the question for you, how much cash do you think Instinet requires on an ongoing basis?

On the balance sheet, what do you think is a run rate level for cash on the balance sheet?

By Instinet, Roger, what do you mean with the Instinet Group?

Really, looking at it as a company today.

I think you can see by just backing out, you know, if you back into the total price paid less the pieces that were disclosed in the press releases on Friday, it's about $565 million of Instinet cash being paid out to shareholders.

I think that we're comfortable saying that that's excess cash.

The remaining cash on the balance sheet which this period, let's rounds it to around $300 million because it moves up and down.

It really is there to offset the liabilities which exist on our balance sheet if you were to go down and look at the taxes payable and the accounts payable and comp, those all represent future obligations on net cash.

And that's essentially what -- that plus minimal regulatory capital requirements is what the remaining balance of that cash consist of.

Okay.

So that 300, you don't really view -- there's really no amount in there that you consider to be excess cash?

I think -- I've tried to answer that question carefully, Roger.

The other way to say that we're comfortable with the excess cash with distributable share holders is around $565 million, the rest is either there to pay for current obligations, future obligations or regulatory capital requirements.

We are extremely regulated around the globe in something like 20 or 30 markets.

Those are three uses for that cash.

All right.

I guess, last question, I'll jump back in the queue.

You said the technology service charges, I guess they're going to come down about 3 million from first and second quarter.

What about D&A for INET, now that you'll be fully depreciating the RASH?

INET, you know, the RASH platform itself is not expensive, and we did not go out and spend significant Cap Ex to build it.

The INET platform is relatively low cost.

Most of the D&A, Roger, that's remaining in March is related to the push down of goodwill from the purchase of Island actually by Instinet.

I think that's somewhere around the $7 million, 6 or 7 million range; it's disclosed in our 10-K.

The remaining D&A is for lease holding improvements and successes.

So it's really not -- you really don't see it going up sequentially?

It'll go up slightly about you nothing that is material.

Okay.

All right.

Thank you.

Yep.

Your next question comes from Daniel Goldberg with Bear Stearns.

Morning.

Hi Dan.

Just a follow-up on Rogers questions, just trying to understand a little bit more, in terms of the deal, how you came up with the valuation of each of the two pieces, or maybe another way is just kind of understanding what the net book value of each of the businesses solid was.

I don't think we've disclosed net book value for each of the entities publicly, Dan.

I think, as Ed said, we ran a very competitive process and I think the price, the billion eight, reflects the markets indication of the value of the business.

I think it was a very thorough and open process.

I'm not sure, where your -- where your question is beyond that.

I'm just trying to understand the justification, look at some of the multiples of the two segments whether it's ECN or the brokerage business, you know, according to our numbers, coming up at a pretty significant discount to what we would compare, each of the segments, to, that are publicly traded, in terms of whether it's PE or whatever multiples that you'er trying to look at, being traded, just trying to understand the -- the valuation basically of the two segments.

I think if you -- if you look at the over all company, if you take the billion eight, eight over [INAUDIBLE] it's about 30 times earnings for '05.

And so that's a transaction multiple that I look at.

It's difficult to peel the onion beyond that.

You could break it up further and say that if you took LJR plus Instinet that's about $380 million of value for the institutional broker.

The remainder being cash and the value for INET.

Okay.

Just a question, I'm getting from a lot of invest errs also is that, you know, why would the company, with significant amounts of cash on the balance sheet and generating significant amounts of cash or free cash, sell, you know, in a transaction when the open market is at a higher price.

Why would they sell at a discounts when it's not a company under distress or duress.

Let me take a crack at that.

I think when we started the process, we would certainly underneath this valuation, Dan, and we came up with a evaluation, you know, that was higher than the market at that time and began the process because we were concerned about, you know, certain vulnerabilities and we felt that we should go out, and in the best interest of our stockholders, see if -- see what the valuation was and whether we could do better for stockholders.

At the time that we actually executed the trade, the stock had traded off, but you that wasn't the case when we started the process and it remains to be seen, where the stock would have been had we announced that we, you know, that we were no longer in the process.

We were, as I said, the worst kept secret in the world and there were frequent and numerous public articles out there saying that we were in a process, and so I'm not quite sure I agree with your assessment that we sold it underneath the market price.

We certainly, when we started the process the stock the trading significantly below the 544, that we agreed to, we looked at all of the bids.

We ran a wide ranging process.

If we felt, in any way, that there were -- that there was a higher value out there on the table, we certainly would have held out for it.

I,personally, am a significant holder of stock in the company and I can tell you that, you know, that we ran as wide a process as we possibly can, and we could looking for as many buyers as we could.

I think, you know, quite frankly the stock went up on some speculation that we would get a better price and unfortunately we couldn't deliver on that, but I do feel strongly that we delivered, you know, value for shareholders by entering the process and getting the highest price that was available in the market place.

In the press release, I think you mentioned in your prepared remarks also that some members of senior management will be part of the institutional broker with Silver Lake.

Can you just discuss the relationships there.

Maybe the ownership structure or what their relationships are there.

Well, I think that hasn't been totally sorted out in terms of the entire management team.

I have promised Silver Lake that I will continue to -- to be a part of the team and that was a key part of their willingness to bid on -- on the broker.

And so, we have gone out and -- and said publicly that I will continue to -- to be the CEO of the new team.

We -- we concluded the negotiations for the company on Friday, literally, an hour before the -- the deal was announced, and I haven't had time to talk to all of my, you know, management team members and talk to them about either investing in the company or participating from a, you know, from an equity, you know, in terms of taking some equity.

So, it's hard for me to outline for you exactly who will and who won't be part of that management team.

But I can tell you that, you know, without my pledging to become -- to be a part of that management team, it would have been difficult to even, you know, to get Silver Lake to continue to be interested.

I really feel very strongly that -- that this team worked as hard as we possibly could to maximize the value to our shareholders and I assure you, that were there any way to attract higher bidders, we certainly would have.

The last question, is there a break up fee in the transaction.

I think there's -- there is.

John, is it like 66 million, 3, 3 and a half percent or something.

Yes, it's just under 3%.

I think it's a pretty standard break up fee, Dan.

Okay.

Thank you.

Your next question comes from Richard Repetto with Sandler O'Neill.

Hi guys.

Hi, Rich.

I got to follow this cash thing a little bit more, Ed.

The -- if the -- there's about 280, or you can round it to 300.

Any way you can apportion that 280 to 300 between the value added broker and LJR?

I'd let -- John, we're not in the same room, Rich, so I'm not sure I understand the question.

John, do you?

I don't mean to punt this.

You asked of me, Rich.

Maybe if you could --

I can get more specific.

Obviously, LJR is getting bought by a separate entity, than Silver Lake, by [INAUDIBLE], so when the cash, if it was to be closed today, what portion of that cash would go to the value broker balance sheet and how much would go to LJR and [INAUDIBLE]?

LJR has very little cash, Rich, something like in the $20 million range.

That cash will go with that business, as regulatory cash capital.

I'm not sure where you got your 280 from.

We certainly haven't discussed how the cash breaks out between INET and Instinet.

Okay.

Well, okay.

I was told, or led to believe that there wasn't a whole lot of cash, that NASDAQ wouldn't acquire a whole lot of cash in the deal.

Receivables but not cash.

Okay.

It looks like the cash that the value-added broker is going to get almost exceeds the price, the 207 that you paid for it.

Again, you can't, it's just like, Rich, it's just like in a simple example, it's like everyone on this phone's paycheck, when you get paid, you have turn around and pay your mortgage, and things like that, so some of the cash is spoken for in terms of liabilities that on the balance sheet.

If you went to the December balance sheet, you'd see that between compensation, taxes and other, this $352 million of liability is on there.

So, you know, I think that all of the businesses that have been sold, if, here's probably the simplest way to look at it, with sufficient regulatory capital to continue to operate, obviously, and significant capital, enough liquid assets to meet the obligations that are on the balance sheet, or the obligation that are going to exist in terms of splitting the businesses apart.

You need more than just a cash analysis.

I think you have to look at the working capital.

Okay, I can go back to the K, I guess.

I'm hindered because I don't have the balance--we don't have the balance sheet as far as the first quarter goes.

Yeah, you're starting out with the $933 million of cash.

Exactly.

So, you back out the liabilities, which were about 350 in the K, and then you back out what you think the excess cash be given out to shareholders essentially is, and that should get you pretty close to working capital.

There are going to be future requirements on the cash in terms of transaction fees and costs of splitting the company apart , but essentially, as I said, the transaction was structured so that there is sufficient regulatory and working capital to meet current needs and future expected liabilities.

Okay, the expected future liabilities.

Do you expect any severance and restructuring -- or charges prior to closing on the Instinet side?

Whether it be the value-added broker or, I guess INET is run pretty lean, but the valued-added broker?

Well, we're still executing on our cost restructuring plan that we had discussed in the prior quarter and I think we made pretty good progress towards that in terms of reducing the institutional broker's legacy technology footprint, and reducing our space, essentially.

So, there could be, I'm not going out, we haven't given any guidance on future charges or anything, I'm not ready to do this at this point.

But I think in terms of restructuring the company, essentially, and ending its run as a public company, there will be costs associated with that.

Okay, I guess, last question, just on the INET side this period, this quarter, it looked like liquidity payments grew quicker than on the revenue side.

Is there anything in particular driving that?

Well, as I said in my brief comments, because the volume was higher during particularly in January and February, the average daily volume, you know that INET has volume-based pricing tiers, so more clients hit those tiers, which is good for us.

Our volume was up, and some of those clients got a higher rebate effectively.

And that's essentially the difference.

Gotcha.

And one last question, Ed, what's going to happen to my friend, Alex Gore?

[LAUGHTER] That is a good question.

We'll have to wait and see.

I wouldn't want to speak for Alex's future, so--

Well, he's done a great job --

I agree, I couldn't agree more.

Okay, thanks.

Thank you.

Your next question comes from Ian Lapey with Third Avenue Management.

Good morning.

Just following up on Daniel's questions about the book value.

Would you anticipate including that, when following the proxy, that the net book value of the three segments that are being sold?

You know, I'd have to check with my accountants.

As Ed said, we just wrapped this up Friday morning, and, you know, we'll disclose any information that is required of being disclosed, but I can't tell you that I've been able to map that out yet.

Could you say whether -- whether Silver Lake and management are paying a premium to book value for Instinet, the institutional broker?

That's -- I don't think we're prepared to comment on that at this point and it's just that we haven't --

How could you not know, I mean, the price compared to book value?

It seems a little hard to believe.

Well, I think there's a lot of moving parts, Ian, in the transaction, for instance, the source of the dividend by which legal entity that it relates to.

And then there are future restructuring expenses as I mentioned that are required.

I'm not trying to punt on it.

I was just not prepared to talk about it at this point.

Okay.

We're required to disclose it, we certainly will.

Okay.

Second question, you purchased during the quarter Bridge Trading from Reuters, which owns 62%, and then it looks like you pretty much wrote off the whole purchase price.

Can you discuss the rationale for that acquisition?

We didn't write-off the purchase price.

The accounting for that, because we purchased it from Reuters, who is a related party, we actually had to follow pooling interest accounting, which doesn't exist any more except for transactions like this.

So we were required to go back and pick up the -- the exact accounting that Reuter's had in place in the past for Bridge Trading, which in the fourth quarter, included a charge of $24 million related to their own goodwill impairment.

We certainly did not impair any goodwill or assets related to Bridge since the time we purchased it.

It's just the historical pickup off of its previous owner's books as they accounted for it.

Okay, I see.

Thank you.

You're welcome.

Your next question comes from Charlotte Chamberlain of Jefferies and Company.

Yeah, one more try at this issue of show me the money.

Can you just -- I think your answer to the question, did any measurable cash go to -- plan to go to NASDAQ for INET, the answer apparently is zero.

There's like $20 million for the soft dollar broker.

And is the remainder, the roughly $300 million, should we assume that $280 million in cash went to -- with the value added broker?

Yes, I think that's the safest -- that's a correct assumption, Charlotte, but you have to also recall, you also have to recall that primarily all the liabilities, you know, are going with the institutional broker also and so a lot of that cash represents, you know, liquids cash against liabilities.

But that is correct.

Okay.

I guess, then, I think what's got us all confused or why this wasn't patently obvious to us when we were all doing this over the weekends is when you said that your net cash and liquids assets was for example 956 million in December, 834 million, then how could those two statements be right, if in fact, there was 300 million that was part of these two -- these two entities.

I don't understand how they could be both cash and cash equivalence and also been required for capital purposes.

Well, I think it's -- let's just make sure we're all speaking the same, using the same terminology.

I think first there's cash and cash equivalence on the balance sheet, that's a GAP concept, and as you get cash, your record on your balance sheet, and at the same time you can be recording obligations.

For example, throughout the year, I record compensation payable but I don't pay people until February the next year.

But the cash builds up during the year and the liability is there.

When I settle a liability I reduce the cash, reduce the liability.

I don't think we -- I think we've been very cautious, Charlotte, in the past in telling, you know, you in the market that the cash balance does not represent excess cash, we always said it's significantly less than the cash, than the cash that's representative on the balance sheet.

I think if you take that cash and break it into its component parts, what then -- the numbers that we spoken about hearsay about 565 million as being essentially sent to shareholders and that is true excess cash.

That's the number you've got to ask me about and that is the excess cash, essentially.

The remaining cash on the balance sheet is required either because we need to have cash in order to be a broker-dealer in good regulatory standing, or we have liabilities on the balance sheet in the forms which is about 300, and some, I read somewhere and about 50 million in December to things like comp and taxes and accruals that we're going to have to pay in the future.

So that cash is spoken for, essentially, and that's why we never have considered the entire cash balance to be excess.

But I think you have -- we have to break into those component parts.

Okay.

The final question has to do with pricing.

As I understand it, the average price that -- that NASDAQ charges is about half a cent per 100 shares for -- for buying and selling 100 shares and yours is about .65?

Is that correct and if not, what is the correct number?

I was wondering -- if you could compare your current pricing versus NASDAQ's current pricing.

Charlotte, I don't know what Nasdaq's current effective spread is.

I know that they have more volume tiers than we do, but I'm not sure where their volume falls within those tiers.

INET's spread is a little bit higher than that what you disclosed for us, but it's not significantly further.

So it's somewhere between.65 and say .70 somewhere around there?

The majority of INET's customers are or a 30/20 10 cent spread.

And depending upon the volume during the period, the spread is somewhere between those two items.

Okay.

Alright, thanks.

Your next question comes from Mike Vinciquerra with Raymond James.

Thank you.

John, just two numbers questions first.

On the Bridge transaction, just backing into the revenues from that from the fourth quarter restatement it looks like about $22 to 25 million in the quarter.

Is that about right for revenues for Bridge?

If you hang on, we'll pull that out but it sounds about right.

And then secondly, you mentioned the $3 million reduction on the INET side for the RASH transition.

Does that mean that that $3 million is going to disappear next quarter on the institutional side?

Is that where that expense line was being paid to?

Mike, those costs will go back to Instinet and some of them will go away but not all of it will -- it will go away over time essentially.

It's not an on and off switch.

It's just part of the over all technology restructuring plan.

Okay, got it.

Essentially, they'll send it back to Instinet and over the next couple of quarters as we downsize our data center and communications network.

All right.

And another question on the -- I noticed your routed volume was up about 20% in the quarter.

I wondered if you could comment on what drove that, remind us of the economics, I believe you don't charge anything for routing volume out.

And then also, from a longer term perspective with NASDAQ, do you see that being a major potential revenue synergy, if you don't see as much routed volume going out, and you're able to internalize a lot more and obviously capture the market data revenues on that.

A lot of the growth in the routed volume, come in on it first.

Was in our listed routed volume which is our -- our pilot to try to aggregate listed liquidity on our books.

We routed about 60 million shares a day of, essentially, New York Stock Exchange shares down through VIA Dot, the purpose of that and that is basically done at a cost plus model.

A lot of people to run it through our book, take advantage of our high speed technology in order to either match in our book, or get down on to the floor just as quickly as they can.

That's most of the growth in the volume.

The OTC routed volume is essentially pretty level, it's around level.

I didn't really essentially follow your entire question of how that would be synergy or no synergy to NASDAQ.

John, if I can jump in.

It might in fact be synergy to NASDAQ because they can match what would otherwise be routed to them, right?

Yes.

But I would say that that -- that question is better -- is better asked of them than us.

That is essentially where I was going with that.

It just seems that with the two liquidity pools, you'd have a higher match rate internally and therefore capture more of that as a revenue source plus the market data fees.

One last question.

On the tape shredding issue, and I don't know if you can comment on that, I guess it was a comment period that had ended, or a response period that was expected back to the SEC back in late February, on what the difference exchange was going to do on the different tape shredding.

Have you heard anything new on that?

Have you heard of anything that would essentially eliminate tape shredding taking place?

No, because we're not an exchange, we were not part -- we were not asked to participate in that and so I don't have -- and I don't have any insight as to where the SEC is going with that.

I can't -- I wish I could help you with that but I don't have anything to tell you.

Okay.

Thank you.

Your next question comes from Lance Breland with EBS and Associates.

Good morning.

Good morning.

A couple of questions.

I understand there'll be an Instinet shareholder vote with the deal and Reuters has to vote in favor of the deal.

I wondering whether that vote by Reuters is sufficient to get the deal done and also wondering whether Reuters could change their vote if the board receives an offer that they deem to be superior to the current NASDAQ bid?

Well, we have -- we have -- the board has a fudiciary responsibility and there is always, in all of these transactions, there's the concept, [INAUDIBLE] fudiciary out, and so certainly the board is going to operate with a keen eye towards the fudiciary responsibilities.

You know, I have to say that I've been -- and I can hear the underlying threat of these questions -- and I can't impress upon you all how -- how long and hard this process has been and how many people were involved in it.

This is a very thorough process.

And it's, you know, certainly Reuters is incentivized and very desirous of maximizing its return on its investment.

So I can assure you all, I know you're paid to be skeptical, but I'm not quite sure of what.

That this process was very thorough going, very public.

Extremely public.

And -- and, you know, the board, today, although it has signed an agreement with NASDAQ and it is committing to seeing that through, is mindful of its fudiciary responsibilities and always has been and always will be.

And that point is well taken, and I think that the argument from your side seems to be that the auction process was -- was open, was fair, was robust in that the price that Instinet shareholders are getting in this deal is what the market will bear.

But when you look at what NASDAQ's stock has done in the last two trading days, you see that there's actually a lot of value here that was left on the table and I think that's where the frustration comes.

Well, I think -- I think, you know, we have always argued that -- that there ought to be consolidation and one of the -- although there may be -- the market may be reacting to that, I do think that we got full value for INET from NASDAQ.

There may be residual value created by the transaction which has nothing to do with the, you know, with the price that NASDAQ paid to us.

So I -- and I do think that there is certainly a -- a heightened interest in this space right now certainly with the New York Archi deal.

So I can -- I hear what you're saying, but I assure you and all the other analysts who we have worked with that, we -- we worked long and hard to -- to thoroughly [INAUDIBLE] the process and it was no secret, it was no secret to anybody.

Your next question comes from Roger Freeman with Lehman Brothers.

Hi.

I just had a follow-up question actually on -- I guess on pricing.

Did -- is there an impact of the -- I guess the routing percentage having gone -- gone up, the matching percentage having gone down that the cost to route out to other market centers are lower than what you would got if you matched it internally and that has an impact on the average pricing on the quarter?

Roger, the matching percentage, I do not believe went down.

You just said it went down?

Okay.

John, am I -- the matching -- did the matching percentage go down in the quarter?

The match volume grew 12% during the quarter and the routing volume grew at a greater rate.

So, it did.

We don't think about -- we don't think about it that way.

We think about the fact our match book grew much faster than the market.

Market share was up 7%.

The routing -- a driver of growing match volume, for us trying to route in order to grow our match volume.

So I think that, Roger, to answer your question, if you're looking at an effective spread over all, your question is, because more people hit the higher tiers at INET, right?

Right.

And that drove the match spread down, you know, and then you're also routing more at a lower effective revenue, will that drive your rate down.

I think that the difference in the growth rate of the two of them is not large enough to create any significant break and that the match volume is what, overall, drives the net revenue number because we're routing, routing 100 million shares a day, 140 at this point, 80 of OTC, and we're matching 530 million shares a day.

Any movement in the match is much more significant than the route because it's essentially five times bigger.

Right.

I guess just sort of, somewhat related is in the fourth quarter, you had a higher level of market data revenues that you talked about helping in the quarter and I guess you didn't talk about it at this time and I'm wondering, is there an impact from, I guess, the fact that you started rebating market data fees on the MX during the quarter.

Did that push broker-dealer rebates up and therefore diminish the impact of revenue fees for you?

The marketing revenues, quarter-over-quarter, were, including the rebates, were essentially flat, Roger.

Kinds of the higher revenue marketing revenue from the higher market share was offset by the amount we rebated.

We rebated actually more than -- more -- we had more rebate expense than we would have gained from the growth, but in terms of the market share, but it wasn't significant.

Okay.

Revenues were flat quarter-over-quarter.

I guess, lastly, can you talk about I guess market share on the NYSE, I know you break out list, it's clouded a little bit because the Qs moved over to NASDAQ .

The first quarter versus fourth quarter.

Did your market share on the NYSE increase?

Yeah, our listed market share, did increase.

I don't have the break out handy, but we can -- we can follow-up with you on that.

Okay.

Thank you.

Grew by essentially 50 percent from 23 million shares a day to 34.

So, essentially, pretty small.

But the market share did go up.

Okay.

Thanks.

Your next question comes from Drew Figdor with Tiedemann.

Yes.

I guess I don't know if you can responds to this but my question is, some of the others is that if you look at Nasdaq, you can say that's the market place and maybe they're speculating but Nasdaq's stock has increase in value by a couple hundred million dollars and when I look at the Archipelago transaction, Archipelago has got a market cap of a billion four on it.

And as far as I know, Archipelago and Instinet have similar market shares and maybe you even have sort of better, I thought, better profitability prospects.

So, to me something is not adding up.

I would just appreciate a comment on that.

Let me comment on that, you know, ours is a cash deal and arrest companies is a stock deal and it depends on the value of whatever the NUCO stock is that they get in return.

And I don't see the New York Stock Exchange putting up any cash for Arca.

So, you know, we can't comment on, you know, on where the market may value Arca, we shouldn't.

I'd personally congratulate Jerry Putnam and his team, they've done a good job for and I feel like in a way they helped to change the structure of the stock market and deserve an enormous amount of credit for that.

But the valuation issue, we're really not in a position to comment.

I would say that ours is a cash deal and Arca's is a stock deal and the ultimate value of the Arca deal will be, and will only be known by looking back at it, you know, quite sometime from now.

So we'll have to wait and see that.

I guess my question is, you know, clearly yours is a cash deal, which in hindsight, doesn't look like the best alternative and when you're talking about the $100 million of synergies being what NASDAQ is talking about, if you take $100 million of synergies and net present value that and split the difference between the two parties as a sharing, that alone is worth $500 million, so that's why they're stock is up $300 million because they're going to save $100 million.

Did you ask for stock participation or is it the fact that the parent company wanted to get out and asked for a cash deal that --

There is a serious issue with -- that a lot of complications on a stock deal for NASDAQ because of their ownership structure, and so all -- all avenues were discussed.

We made, you know, a -- a and asked for, as much as possible, set up dynamics which would create, you know, bidding dynamic and ask for, most, that we could.

By -- by putting the company up for auction and making it available to all bidders and making that auction widely available to anybody.

This is not a deal which was set up between two companies.

This is not a deal which was done without the knowledge of all of the competitors in the space.

I won't say who, we had discussions with, but we had an enormous amount of discussion with a lot of different players, so this was -- was the best deal that was offered to the board.

The board looked at it and thought that this represented the most value that it could reasonably get for the shareholders at the time, and we believe that this was a fair deal from our perspective for all shareholders, not just a particular set of shareholders.

Would Reuters have accepted a stock transaction in it would have structured and it seems there's other ways, there's always creative ways to structure synergies in a deal.

It could be a CVR --

I'm more than happy to engage you on this but -- I do think at some point this -- the discussion, just keep going around and around the same issue.

My specific question is, would Reuters have taken a stock exchange or did they require cash?

This board did not set this auction up to be, to require cash.

We -- we, you know, would have to evaluate the securities offered to us in terms of, you know, whether we believe that the package was worth more than a cash proposal.

So it was, you know, there was no -- the board didn't close its eyes to any possibilities, and we would have considered any and all proposals to maximize value to shareholders.

This board was not out there selling because Reuters wanted to get out, and the notion that Reuters wanted to get out at less than the value that it could is misguided.

Reuter was absolutely incentivized in the same way as all shareholders to maximize its value.

So I don't kind of get -- the gist of that, you know, of that -- you know question.

My only gist and I'll leave it at this.

You can see the stock market reaction of NASDAQ and you can see what the market valuation for Arcipalego is, and to my business and to my understanding, Instinet and Arcipalego are very similar market share enterprises.

So there's a big disparity between what Arcipalego is trading for and worth now and what the INET business is worth, never mind the other pieces.

I guess all I can say is that's hindsight as they say is 20/20.

And the board had the benefit of a long auction process in which all proposals were entertained.

And this was, by far, the most attractive proposal and the board believed that it was -- that it was the right one for it to take, given -- given its long process and given the amount of people that were interested in the company, so that's about -- I guess I'm repeating myself, but I hear what you're saying.

I think your comments are a little bit, you know, as I said, the result of what's happening in the market today and we'll see how that plays out over time.

Your next question comes from Charlotte Chamberlain with Jeffreries & Company.

Just a quick kind of housekeeping things.

I'm presumably judging from what SEC chairman Donaldson said in the papers, presumably SEC has at least looked at the deal and not objected to, it but I was wondering, with respect to [INAUDIBLE] and DOJ, has this been passed in front of the DOJ with at least passed with approval.

And the other thing is, do you expect it to close the end of this year or when do you expect it to close?

We think -- I'm a little confused, Charlotte.

Is your question has the Department of Justice approved it already or --

I assume they haven't, but it sounds as if this was no -- certainly, Mr. Donaldson didn't seem surprised about this.

So presumably the SEC was at least made aware of this and presumably didn't raise any significant objections or potential significant objections, and I was just wondering if the same was true with the people that have to approve it from anti-competitive, from an anti-competitive perspective.

You know, obviously we sought counsel and counsel believe strongly that the combination will withstand HSR scrutiny.

Afternoon when do you expect it to close?

We're hoping for it to close as quickly as possible.

But we do think because of that HSR scrutiny and other regulatory requirements, that -- that it will take quite some time between six and 12 months, I guess the best guess is right now.

Okay.

And then finally, kind of -- I know you're tired of this.

I'm trying to -- I want to, you know, vet this out because I certainly don't want there to be any impression that the board or -- or management did not try to maximize shareholder values.

I'm happy to walk you all through --

What -- did the -- was the New York Stock Exchange, did they look at -- at INET and pass or -- I guess the question would be, did the New York Stock Exchange have a chance to look at INET and the other question would be --

Let me answer that, Charlotte.

And then you can -- the answer to that is definitive yes.

They had a chance to look at it.

And presumably passed.

You know, I just don't know where issued go in that, but I assure you they had a chance to look at it thoroughly.

And then the other thing is, again, following up, presumably it could have been structured so that Reuters got whatever cash they need to have and the public shareholders could have had stock in say NASDAQ or something.

Was that just too cumbersome to do or something that wasn't really feasible?

Well, that's assuming that NASDAQ was willing to give us that.

They -- they came in with a very -- what we thought was a reasonably aggressive cash proposal relative to the other bids and offers -- other offers that may or may not have been available at the time.

And I assure you, we took the highest offer.

And -- you know, that -- that -- that's about all I can say.

In hindsight, I suppose, one can say well why is it trading at that?

It's quite possible, that this is a win-win for both NASDAQ shareholders and my shareholders.

I know that in -- in light --

That wasn't my question about ex post.

The issue was structuring it so that the public shareholders could have gotten stock even if Reuter just wanted cash, was that structure just unfeasible?

I don't know.

It wasn't a structure that was made available to us by the bidder.

The bidder gave us their highest bid and it was structured.

I think they wanted to pay cash for it.

They believed that that was the best way to make an accretive deal to them and they had attractive financing sources.

And they gave us an aggressive cash bid for INET.

Okay, thanks very, very much.

Okay.

Your next question comes from Daniel Goldberg with Bear Stearns.

Just one additional question regarding market share.

Presumably a significant amount of your order flow came from the institutional broker to the ECN, with it being now two separate companies, can you comment on whether you think you might lose some amount of market share?

I'm sorry, will you say -- I didn't -- just repeat the question.

I apologize.

Yes, sure.

Presumably, I think as a consolidated company, now a decent amount of your order flow on the ECN comes directly from the institutional broker and as the businesses are separated and under two different parent companies, can we assume that there could be some loss in market structure or -- I'm sorry, loss in order flow going from the institutional broker to the ECN.

I wouldn't think so.

We -- this is going to sound gratuitous, but we really have been routing orders to the best possible point up to now.

We within these Plexis surveys because we do give our customers best execution and we are at the -- at the mix we are at now, Dan, because we believe that serves our customers best.

So I wouldn't think that the deal itself would effect the way that we route order flow.

We get a tremendous benefit from our knowledge of -- of electronic executions from our legacy of owning INET and Island and the Instinet ECN beforehand.

We will continue to use that, that knowledge to further our customers interests and hopefully we will continue to grow the institutional business because we focus so single-mindedly on delivering best execution to our customers.

We don't give INET business because they're a sister company, we give them business because they perform best for our customers.

Thank you.

Thank you.

Ladies and gentlemen, we have reached the allotted time for question-and-answer session.

At this time I'd like to turn the call back over to Lisa Kampf for closing remarks.

Before we end this call, a reminder that the webcast will be available for replay later today and a transcript should be available on our website later this week.

Please contact me directly with any follow-up questions.

My number is 212-231-5022.

Thank you for participating in Instinet Group's earnings call.

Thank you ladies and gentlemen.

This concludes Instinet's quarter one 2005 earnings conference call.

You may now disconnect.