This excerpt taken from the RTRSY 20-F filed Mar 17, 2006.
11.5 Instinet Group
Operating and Financial Review continued
A key driver of Instinet Groups business was average daily trading volume in the US securities markets, which increased in 2005 over 2004 levels.
A significant portion of securities traded in Instinet Groups business were NASDAQ-listed securities. Average daily trading volume in NASDAQ-listed stocks, which decreased slightly by 0.8% for the three quarters to September 2005 compared to the full year 2004. Average daily trading volume in US exchange-listed stocks has increased over the same time period by 7.1%, continuing the trend of the past five years.
Overall market share for INET, the electronic marketplace, had increased slightly to 13.5% of total US market share volume by September 2005 from 13.4% in 2004. Overall market share for Instinet, the institutional broker, decreased to 2.6% of total US equity trading volume to 30 September 2005 compared to 2.7% in 2004.
The volatility in market share reflected the intense competitive environment within the brokerage business, which has resulted in price reductions since 2001. In September 2001, INET reduced average prices by 11% with a new pricing schedule for US broker-dealer customers. In March 2002, INET began offering broker-dealer rebates. In October 2003, it reduced pricing for routing orders in Nasdaq-listed stocks to other trading venues through its automated smart order-routing system by 37% and introduced tiered pricing, offering lower prices to customers based on volume levels. In October 2004, INET introduced a new pricing schedule for transactions in US exchange-listed stocks. In January 2005, INET announced that it would share up to 50% of its market data revenue for certain American Stock Exchange transactions.
Instinet also operated in a highly competitive environment. Traditional brokerages were also severely impacted by tighter spreads, smaller commissions, the decrease of NASDAQ market making and diminished investment banking fee revenues, which compelled them to spend more time looking for additional profit-generating opportunities. This led traditional brokerage firms to increase their focus on offering algorithmic trading, program trading and direct market access to institutional customers and resulting in their directly competing with Instinet in price and technology to provide these services to customers. As a result, customers had become more demanding and cost conscious. Instinet pricing for US equities, measured in cents per share, declined 21.0% to 30 September in 2005, and 2.6% in 2004, and pricing for non-US equities, measured as a percentage of the total consideration of the trade, declined 12.5% to 30 September 2005 and 5.4% in 2004.