Especially on Wall Street.
It is an understatement to say that the way securities are traded has evolved from
a simple floor-trader open-outcry method to microwave transmission of data
packets. A sales trader or broker wouldn’t even begin to recognize the stock
market.
But one firm has managed to maintain a presence in the equities market amid the trading, turmoil, electronification, fragmentation, regulation and digitalization – Instinet. And as the broker-dealer/technology firm reflects on the last 50 years on Wall Street, its current Chief Executive Officer Ralston Roberts sat down with Traders Magazine’s John D’Antona Jr. to reminisce and discuss the last half a century of change in the equities markets.
Traders Magazine: Discuss the changes in the
investment life cycle over time, including the integral role Instinet has
played in advancing and shaping it (including the transition from investors
needing to do everything with intermediaries to the more efficient marketplace
created by Instinet).
Ralston Roberts: Fifty years ago, “price discovery” for a stock
was done by asking your brokers for a quote or waiting around for information
on your security to stutter out of the ticker – if you were lucky enough to
have one.
There was little to no
transparency, little to no protection from information leakage, little to no
ability to assess a concept such as “reversion” or “best execution”. There weren’t many choices with regard to how
orders were handled. It was messy and there were many mistakes. Position management was a difficult, manual
process and often took days to determine.
If your broker didn’t pick
up your call, you were left totally uninformed. Surveillance was practically
impossible. Spreads were wide and
volatility was dramatic – which is essentially the opposite of efficiency.
The concepts we value
today: transparency, efficiency, fair access, best execution, anonymity – none
of these things were available before electronification. Jerry Pustilnik,
Instinet’s founder and original CEO, had a vision. It was for an electronic network for trading
stocks. This would be an alternative to
the single central limit order book that was accessible to only a few people. A
place for investors to connect with each other to execute trades at the best
possible price, and for lower cost.
These principles seem so
basic now, but their introduction was a moment in history that would slowly,
but steadily, begin a transformation.
TM: How has Instinet evolved during its 50 years?
Roberts: The firm has grown in headcount and scale, changed
structure, ownership models, its global footprint, and our product mix has
changed over time. Interestingly, when
we look back, Instinet’s evolutionary changes and significant innovations have
consistently occurred just in advance of major market structure events.
Being an anticipatory
organization that is willing to challenge the status quo has become part of the
firm’s culture.
TM: Has that evolution been smooth? What were some of the
“bumps” the firm has encountered?
Roberts: Evolution is a slow and gradual process. But revolution is
disruptive and often messy. Instinet has seen both types of transformation over
its history.
Five decades ago, the firm
began as a privately held startup. It was acquired by Reuters in 1987 – just
after Black Monday and just before Order Handling Rules. It was divested and
went public just as the Tech Bubble was bursting. Instinet went on to make its
own acquisition of their then competitor, Island ECN. The firm divested the
crossing technology – selling “INET” to Nasdaq in 2006, once again going
private. Ultimately, Nomura acquired us
in 2007 just before the financial crisis of 2008. Since then, the firm created
and then sold Chi-X, and more recently we acquired BlockCross.
Dramatic changes bring a
few aches and pains as the firm’s people make structural or cultural
adjustments. But they also bring the
benefits of growth. If we’d attempted to stand still all these years, I don’t
believe we would have remained as nimble or as relevant as we are today.
TM: How does Instinet fit into the 21st Century
equities market structure?
Roberts: Our agency model is well suited to the evolving global
market structure environment. We are designed so that our interests are aligned
with those of our clients: when they succeed, we succeed. Our focus is on
helping them to achieve execution quality – a very straightforward
premise.
Being agile and fully
electronic gives us efficiency and scale.
Being global, broker-neutral and multi-asset means we can provide our
clients with a wide array of opportunities and workflow solutions. Being big
data-driven and highly quantitative, with exchange-grade technology and a
multi-colocated infrastructure means we can deliver access, intelligence,
speed, and transparency to clients who, rightly enough, demand ever-increasing
sophistication and performance from their relationships.
TM: Where does Instinet fit in the technology landscape in
today’s market structure? Creator of new tech? Advisor on new tech? Distributor
of new tech?
Roberts: Do I have to only choose one of those?
Here’s what I think:
technology is the language we speak now. It’s not a product as much as it is a
“medium”. We provide our clients with
insights and intelligence. We deliver access and aggregate liquidity. We offer
execution strategies, tools and advisory. And we operate platforms that empower
their workflow, so they can derive benefit from every part of the investment
life cycle.
Nothing in our industry is
static, change is the new constant. So,
we try to create a culture that doesn’t just react to change – our goal is to
proactively make positive change happen.
What we realized as we
prepared for our Fiftieth Anniversary this year, is that Instinet’s founding
mission was to connect people with information, and with each other, to trade
more efficiently. When you look past the awesome complexity, velocity and scale
of today’s global financial markets, this still remains the essence of what we
do.
I can’t tell you today
exactly what the marketplace will look like fifty years from now. But I can
tell you that our goal is to still be there, at the front edge of where it is
going.
