With its market share shrinking in recent months, Nasdaq has said it will buy automated trading platform Brut ECN from SunGard, for $190 million in cash.
Nasdaq, the No. 2 US stock market by capitalization, said the transaction is expected to close in the third quarter of 2004 and has been approved by both companies’ boards of directors.
“This acquisition is part of multi-pronged effort from the Nasdaq to support its mission to be the No. 1 stock market,” Bob Greifeld, Nasdaq’s president and chief executive officer, told reporters in a conference call Tuesday, as reported on Forbes.com.
Greifeld said he expected the Brut acquisition to benefit Nasdaq as regulators make broad changes to securities trading laws. The Securities and Exchange Commission is considering relaxing the “trade-through” rule, a 30-year old statute requiring traders to obtain the best quote for a stock regardless of whether it is on a competing market. The proposals, called Regulation National Market System — or Reg NMS for short — are currently under review by regulators. Analysts anticipate that changes to market structure will ultimately benefit automated trading centers, Forbes said.
According to industry sources, SunGard had been shopping Brut around in recent weeks, including to Inet, the dominant ATS created earlier this year by the fusion of the Island and Instinet sister ECNs.
With the acquisition of a broker-dealer, Nasdaq is following the outbound model pioneered by ArcaEx, which is using its own brokerage subsidiary to access other markets. This likely puts an end to previously announced plans for Inet–which quotes on the National Stock Exchange–to move to Nasdaq, provided that Nasdaq would use Inet’s smart-router technology, according to a story on Securities Industry News.
Brut was engaged in merger talks with Inet, which would have created a formidable competitor commanding nearly 40 percent of Nasdaq’s overall volume. This would have threatened Nasdaq’s role as the primary market in its own listings, the SIN story pointed out.
Nasdaq no longer separately releases volume executed on its SuperMontage platform and bundles the data with other trades, for an overall market share of about 48 percent, SIN said.
While electronic execution venues operate on thin margins, logging miniscule profits, aggressive competition continues to put a premium on strategic mergers, SIN pointed out. The $190-million price tag for Brut is much lower than the $500-million figure involved in Instinet’s purchase of Island in September 2000. Island, at the time, commanded a market share comparable to Brut’s today.
With the acquisition, Brut returns to its founder. Greifeld created the ECN in 1998, as part of a consortium that included Knight Trading, Morgan Stanley and Merrill Lynch. SunGard bought out its partners in Brut last year. The ECN is particularly attractive to active traders, a fast-growing constituency that Nasdaq has been courting lately by adding FIX connectivity and improving SuperMontage functionality, according to the SIN story.
Brut quotes on SuperMontage but reports its internalized trades to the Boston Stock Exchange, a factor that further contributed to Nasdaq’s market share slide.
“This is just one more step in Nasdaq’s multi-pronged strategy to increase our share of trading, raise the number of Nasdaq-listed companies, reinforce Nasdaq’s status as the premier U.S. equity market and serve investors better,” Greifeld said of the acquisition, which is expected to close in the third quarter, SIN reported.