Big changes are afoot with the National Association of Securities Dealers' OTC Bulletin Board, the electronic stock quotation service for the trading of shares in nearly 7,000 companies. Many of these are small-cap and thinly-traded issues.

The bulletin board is loosely regulated. About half of the listed companies file financial statements. There are no listing standards.

The bulletin board is controversial. In fact, regulators charge that investors have been duped out of billions of dollars in stock scams perpetrated on the bulletin board. Some people closely connected to bulletin-board trading, however, dispute this estimate, saying it is grossly inflated.

Investor Protection

The main changes announced by the NASD would enhance investor protection by significantly increasing the amount of timely and accurate information about the companies that are quoted on the bulletin board.

The changes are subject to approval by the Securities and Exchange Commission.

In a release, the NASD said brokers in the future would be required to take additional steps prior to recommending or conducting a transaction in an over-the-counter (OTC) security not traded on Nasdaq.

The NASD is seeking comment from investors, regulators and other groups on each of three proposals prior to their submission to the SEC. The first would allow only those companies that report their current financial information to the SEC, or banking and insurance regulators, to be quoted on the bulletin board. This proposal would provide a phase-in period for those securities already quoted on the bulletin board.

The second would require brokers, before they recommend a transaction in an OTC security, to review current financial statements on the company they are recommending.

Finally, prior to the initial purchase of an OTC security, the proposals would require that every investor receive a standard disclosure statement, prepared by the NASD, emphasizing the differences between OTC stocks and other market-listed securities.

Securities quoted on the bulletin board include national, regional and foreign equity issues, warrants, units and American Depositary Receipts not listed on any other U.S. national securities market or exchange. Beginning in April, foreign securities will have to be fully registered with the SEC to remain quoted on the bulletin board.

Under the proposals, the NASD said, all companies that do not report to the SEC, or bank and insurance regulators, would be eliminated from the bulletin board. The delisted companies would be eligible, however, for quotation on the pink sheets. A phase-in period would apply before this measure is implemented.

Further Changes

The NASD is considering further changes. These include a halt on trading in a bulletin board stock when a foreign regulator halts trading in the same stock in the primary market.

While there have been scams associated with the bulletin board as well as the pink sheets, the old-fashioned manual OTC trading service run by the National Quotation Bureau in New York, defenders of the non-Nasdaq side of the OTC market stress that a huge majority of trading is fair and legitimate.

The intense scrutiny of this OTC market by regulators in recent times is particularly troubling, the defenders stress. "They are painting the industry with one broad brush and that's unfair," one trader said.

"I've been in this business all my life," the trader added, "and I've always played by the rules. But reading newspaper reports, you would think I was engaged in the organized crime business."

Indeed, small-cap trading on the OTC market has been hurt by allegations that organized crime entered some of the business. Last year, Business Week ran a sensational cover story on how organized crime had supposedly infiltrated the small-cap market on Nasdaq stocks. Some traders think the piece went over-the-top, once again grossly inflating the truth.

Private vendors will be allowed to confirm and affirm trades between institutional customers and broker dealers under a plan announced by the National Association of Securities Dealers.

Rules approved in 1982 restrict confirmation and affirmation, or acknowledgment services, to Securities and Exchange Commission-registered clearing organizations, such as the New York's Depository Trust Company (DTC). The DTC currently has a monopoly in the confirmation and affirmation business.

The NASD said its plan recognizes the technical advances that have occurred in trade processing. The changes must be approved by the SEC.

Under the NASD plan, vendors would be allowed to confirm and affirm transactions once an independent auditor has certified that they have met specified financial and operational standards. The SEC also has authority to review all vendor applications.

Institutional Trades

The NASD said that every trade between an institution and a broker today must be affirmed and confirmed before the trade can be settled and the securities can change hands. At the moment, the NASD estimated that more than half of Nasdaq's average daily volume, 600 million shares, are institutional trades.

As previously reported, Boston-based Thomson Electronic Settlements Groups (ESG) has lobbied to bust open the DTC monopoly in the electronic confirmation and affirmation of institutional trades. Thomson ESG, whose position was supported by the Securities Industry Association, an industry trade group, petitioned the SEC to amend the 1982 rules.

Now, the rule change would seem to pave the way for Thomson's entry into this potentially lucrative business.

"This plan is designed to ensure the safety and soundness of the nation's clearance and settlement systems, while encouraging innovation and competition from the private sector," said NASD Chairman Frank Zarb in a prepared statement. "Working together with the government, industry and other self-regulators to develop this plan is self-regulation at its best."

(Thomson ESG is a subsidiary of Thomson Financial Services, the parent company of Securities Data Publishing, publisher of Traders Magazine.)

The National Association of Securities Dealers' effort to keep its proposed integrated trading system under wraps, until details were filed for public comment on Dec. 22, riled a well-known electronic communications network (ECN).

"The general NASD membership had not been allowed to hear the proposal ideas beforehand," said Kevin Foley, manager of equity-trading applications at Bloomberg Tradebook, the ECN launched 12 months ago by Bloomberg L.P. Bloomberg is an NASD member firm.

"I am finding out about NASD plans as a member of the general public," Foley added.

The proposed trading platform, originally billed Next Nasdaq, could radically transform Nasdaq's current system. But full details are sketchy, as the trading community has yet to interpret the full scope of the NASD's 119-page filing.

As envisioned by the NASD board of governors, the new system aims to integrate SOES and SelectNet and to provide a voluntary central limit order file.

Some ECNs, meanwhile, worry that the proposed facility could turn into a mandatory, centralizing network that somehow sets the inside market.

Foley worries that the new system could replicate an earlier but unsuccessful Nasdaq plan NAqcess to launch an integrated system.

Foley said that if the market is forced to protect the file and not allow trading around it, the system could unfairly hurt competition.

"It would be unfair if all ECN orders had to go to the book for execution," Foley added. "You can't prevent competition."

However, if the Nasdaq system functions as an ECN, Foley said, it would be a welcome competitor in the marketplace.

Island, an SEC-approved ECN used by day-trading firms, but unpopular with market makers, is also concerned.

"It is hard to say how the new system will look like until it is filed," said Josh Levine, president of New York-based Big J. Securities, prior to the December filing. "If it is fair, that will be great. But if it unfair, it could be awful."

Levine added that an equitable system, in his view, would immediately match customers' orders under certain parameters, and would not shut out rival systems. "Any system just needs to keep a level playing field," he said.

Outlines

Several people close to Nasdaq's Quality of Markets Committee, who were consulted on the NASD's proposed platform, provided some outlines of the system, but were unclear about substantive elements.

Based on accounts from these sources, broker dealers will have access to the system for the execution of customer orders. The current plan allows broker dealers to sponsor an institutional client's direct access to the new system. Under this arrangement, the system would operate on a price-time priority, interacting with any quote in the book.

Nasdaq considered a ten-second delay rule for orders entered into the system, apparently as an effort to curb gaming or market manipulation on ECNs. With the delay rule, an order placed in the new system could not be canceled until ten seconds had elapsed.

SOES Bandits

Another suggested measure could crimp abuses by so-called SOES bandits who enter small orders for automatic execution. Under this proposal, a market maker would have up to 30 seconds to execute or decline an order of up to 1,000 shares if that market maker has already traded that stock at the current posted quote-size.

If the market maker declines to execute the small order, the market maker's quote would have to be adjusted. If the quote was not adjusted within 30 seconds, the order would be automatically executed. Conversely, a market maker who had not traded at a current quote could not decline an order of up to 1,000 shares.

The new Nasdaq system would track whether market makers have traded at their current quote-size, and automatically execute orders as appropriate. However, if the market makers' current quote-size is 5,000 shares or more, this rule would not apply.

Some experts question a 30-second delay rule, suggesting it seems to technically violate the firm-quote rule.

Disapproval

Meanwhile, many Nasdaq market makers have voiced their disapproval of a Nasdaq execution system. Foley offered his sympathy.

"I think NASD members question why a regulator is getting into a competitive marketplace," he said. "We at Bloomberg can't be afraid of competition, but will the competition be fair?"

A member of the Quality of Markets Committee, who requested anonymity, agrees.

"Should a self-regulating agency be competing with ECNs?" the committee member asked. "Does the NASD have the technology to pull this off?"

John E. Pinto, a 29-year veteran and senior official of market regulation at the National Association of Securities Dealers, has left the organization to run the Washington branch of Dover International, an Atlanta-based consulting firm.

Pinto had most recently served as an executive vice president of member regulation at NASD Regulation, the NASD subsidiary headed by Mary Shapiro. NASD Regulation was created two years ago in the wake of two governmental investigations of Nasdaq.

"I saw a significant change happening in the organization" Pinto said. "Mary Shapiro was bringing in her own people. I felt it was time for me to move on."

Pinto joins Dover as an executive vice president and president of Dover's Financial Services Exchange, a subsidiary that specializes in mergers and acquisitions. He is currently the sole employee at Dover's Washington outpost. His compensation includes an equity stake in the firm.

Pinto had a high-profile NASD career. Pinto joined the organization in New York in 1969, gaining prominence as an examiner. He moved to the NASD's main office in Washington in 1975, serving separately as a director of enforcement, vice president of surveillance and senior vice president of compliance.

In 1989, Pinto was named executive vice president of regulation at the NASD, responsible for all enforcement, examination and surveillance at the organization. As executive vice president, Pinto supervised all regional attorneys and oversaw all advertising, compliance, corporate financing, enforcement and market-surveillance departments of the 14 NASD district offices. He was named executive vice president at NASD Regulation in 1996.

"Dover may not be the most well-known consulting firm," Pinto said of his move, "but it had a wide range of clients and services and it allowed me to stay in Washington."

Pinto's said his first task at Dover is to build a strategic presence for the firm in the nation's capital. He plans to hire staff this year for the branch.

In a prepared statement, Harris Hobby, a managing director at Dover, said, "John is one of the leading national experts on securities regulation, compliance and market surveillance."

"His enormous depth of knowledge, his reputation for integrity and the respect he earned over his remarkable NASD career make him an outstanding addition," Hobby added. "We are extremely pleased."

Stuart Haddow was appointed an international sales manager at Braid Systems, a London-based financial technology company. Haddow, a Braid employee since 1993, will help expand the company's order delivery presence in the U.K., the Middle East and Africa.

The Boston Stock Exchange (BSE) announced six major employee promotions. D. Michael Kattman was named a vice president of finance and administration, responsible for accounting, administration, clearing and financial oversight. Karen A. Aluise was promoted to a vice president of legal and regulatory affairs. Marybeth Shay was named a vice president of sales, responsible for marketing exchange products and services while fostering client relationships. An 18-year BSE employee, Brian F. Colby was promoted to assistant vice president of surveillance and compliance. Mary M. Brausch was named a manager and internal auditor at the BSE. Milan Guerrero was promoted to a computer operator in the exchange's New York office.

Michael H. Sutton, the chief accountant for the Securities and Exchange Commission, announced his intention to resign later this month. A former partner at accounting giant Deloitte & Touche, Sutton was to protect investors by working to ensure the objectivity and independence of the firms that audit public companies. Appointed to his SEC post in June 1995, Sutton cited personal reasons for his resignation. The commission is conducting a search to fill the position.

Joan Logue-Kinder joined New York-based Lynch, Jones & Ryan as a director of marketing and communications. Reporting to chairman and chief executive Howard Schwartz, she will oversee all external communications and marketing for the institutional agency trading firm. Logue-Kinder previously served as assistant secretary of the U.S. Department of the Treasury, appointed by President Clinton.

Newly-renamed Nationsbank Montgomery Securities hired Jonathan Sandelman as a senior managing director of equity derivatives. Sandelman was a managing director of global equity derivatives at Salomon Brothers in New York, which was recently acquired by The Travellers Group. He will be based in New York, where Nationsbank plans to add more than 30 staffers.

Luby Sparber was appointed to a newly-created position at Merrill Lynch International, head of equity and debt operations. Working out of London, Sparber will concentrate on the firm's increased trading presence in Frankfurt, Madrid, Milan, Paris and Zurich. Formerly a director of equity operations in the U.K., Sparber oversees a staff of 280 and reports to Mark Alexander, head of European operations.

Jim Osborne joined EVEREN Securities in Portland as the branch manager and a senior vice president. Osborne was formerly a branch manager for Prudential Securities in Portland.

The Chicago Board Options Exchange named Robert J. Birnbaum to its 21-member board of directors. Birnbaum is a past president and chief operating officer of the New York Stock Exchange and the American Stock Exchange.

Jeff Edelman joined PaineWebber in New York as a senior retail equity analyst, reporting to Michael Culp, director of the firm's research department. Edelman moved to PaineWebber from Deutsche Morgan Grenfell in New York.

The Boston Stock Exchange (BSE) elected a new vice chairman and three new board governors for 1998.

Bruce K. Newell, a vice president at Pershing Trading Company in Boston, was elected to serve as vice chairman of the BSE board of governors.

The new governors elected to two-year terms are: Rochelle A. Bays, a senior vice president of support services and exchange trading at Charles Schwab & Co. in San Francisco; William F. Devin, a Boston-based director of the Cypress Tree Floating Income Fund and trustee of North American Funds; and David A. Herron, a vice president and manager of specialist operations at Fidelity Capital Markets in Boston.

Newell replaces Devin as the BSE vice chairman.

Kenneth Swain joined Jefferies & Co. as a senior vice president and sales trader in the equity trading division. Formerly a sales trader with Cantor Fitzgerald and Lehman Brothers in New York, Swain will be based in the firm's New York office.

Spyglass Trading in Dallas hired David Alexander as an equities and options trader. Alexander was an institutional sales trader on the cross-town desk of Principal Financial Securities before joining Spyglass.

David S. Pottruck was named co-chief executive officer in the San Francisco headquarters of Charles Schwab & Co. Pottruck will remain the firm's president, continuing to direct Schwab's administrative, financial and technology groups.

Easdaq, the pan-European, screen-based electronic stock market just finished celebrating its first full trading year, raising more than $854 million for 23 listed companies.

Although the 12-month volume was under 90 million shares the equivalent of about ten percent of Nasdaq's daily volume and the average trade price equaled $55,700, Easdaq officials are jubilant.

"To have a pan-European stock market operating successfully is a great achievement," said Stanislas Yassukovich, chairman of the Brussels-based exchange. "We have gained substantial critical mass, trading volume has risen steadily and the market has shown that it is robust even in turbulent times."

"We look forward to the success of a single, well-regulated market to benefit investors and companies, and contribute to the economic development of Europe," said Jacques Putzeys, Easdaq's chief executive.

Easdaq went live on Nov. 27, 1996 with the trading of Dr. Solomon's Group, a Belgian anti-virus software company.

In the first 12 months, Easdaq attracted a network of 56 members from 12 countries, including several market makers from the U.S. The U.S. market makers include New York's Cowen & Co., Hambrecht & Quist of San Francisco, Herzog, Heine, Geduld of Jersey City and newly-renamed Bank America Robertson Stephens, based in San Francisco.

Easdaq was established in Belgium, a European Union member state, and is governed by a single legal system and one supervisory structure. It is not an association of multi-domestic exchanges.

Easdaq provides a public trading facility for small-cap, high-growth companies. The screen-based, quote-driven market uses a multiple market-maker system modeled on Nasdaq. Listed companies are required to distribute a minimum free-float of shares, equal to roughly 20 percent of total capitalization, to no less than 100 holders.

Listings requirements, which are subject to international accounting standards, are completed in English. There is a simplified admission process for companies listed on Nasdaq, the New York Stock Exchange or the American Stock Exchange that want to have a dual listing on Easdaq.

Easdaq officials are preparing to launch an interactive Internet site providing company history, a 15-minute delay for stock prices and other information. The exchange is also planning to introduce the Easdaq All-Share Index by the end of the first quarter.

Easdaq Key Figures for 1997

Market Days 259

Listed Companies 23

Total Market Capitalization $5.08 billion

Average Market Cap. Per Company $220.7 million

Total Turnover $1.16 billion

Capital Raised $881 million

Shares Traded 88.70 million

Turnover Rate 32.25 percent

Average Trade Size $55,700

Average Market Makers Per Company 5.70

Index Change up 31.69 percent

Note: All figures as of Dec. 5, 1997

All monetary figures in U.S. dollars

Source: Easdaq

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Union Bank of Switzerland and Swiss Bank Corp., the two banking giants planning to merge later this year, have sent a reassuring message to Stamford SBC's trading operations will remain in Connecticut.

The sparking $200 million complex that houses roughly 700 traders working for its SBC Warburg Dillon Read subsidiary, was unwrapped by SBC last August.

On Dec. 8, the two Swiss banks announced their agreement to merge in a $25 billion deal that would create the world's second largest bank. The deal is expected to close in May.

"This is a merger of economics," said Dennis Gallant, a money-management consultant at Boston-based Cerulli Associates. "The two banks are positioning to keep from being acquired."

The combined banks, to be named United Bank of Switzerland, will have $592 billion in total assets and $913 billion in managed assets. According to insiders, the new bank will have four major divisions: private banking, institutional asset management, consumer and corporate banking and SBC Warburg. Bank sources calculate that half of the new company's yearly revenue will be generated by SBC Warburg.

"SBC Warburg is institutional based," Gallant said. "United Bank will probably make a strategic move to gain retail access in the U.S. after the housecleaning is completed."

SBC Warburg, the international investment-banking arm of Swiss Bank, has undergone rapid growth in the last seven years. In 1992, it completed its acquisition of O'Connor Associates, a Chicago-based derivatives partnership.

Two years later, SBC Warburg acquired Chicago's Brinson Partners, a money-management firm, in a deal worth $750 million. In 1997, SBC Warburg acquired New York-based investment bank Dillon, Read & Co. in a $600 million deal. All told, SBC's eight U.S. branch offices currently have 3,000 employees.

SBC Warburg will keep its investment banking headquarters in New York.

World's Largest Banks Ranked by 1996 Assets

Rank Bank Assets in Billions

1 Bank of Tokyo-Mitsubishi 752

2 UBS/Swiss Bank 590

3 Deutsche AG 575

4 Sumitomo Bank 513

5 Da Ichi Kangyo Bank 476

6 Fuji Bank 474

7 Sanwa Bank 470

8 ABN Amro Holdings 444

9 Industrial & Commercial Bank 436

10 HSBC Holdings 405

All figures in U.S. dollars

Source: Dow Jones

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For some private companies, the lure of going public may be too much to resist. Practically instant growth, and the chance to put business on a faster track, are certainly tantalizing.

More than $180 billion in finance was raised by underwriters over the past ten years for thousands of companies.

Even so, why are many new companies left feeling like stock-market orphans after the hoopla and initial-public-offering process is completed? Why do the strongest only get the full support of their underwriters after the IPO tag falls from the stock?

Part of the reason is investor relations (IR), a strategy used by public companies to disseminate their business objectives to the financial community.

Of course, the underwriters' unwritten rule is that they provide coverage of the company after the IPO process, according to Sarah Mavrinac, research director on a recent IPO survey conducted by accounting giant Ernst & Young. About 30 percent of these companies, she noted, are "orphaned" immediately after the IPO is completed.

Indeed, most newly-public companies are satisfied with the IPO process overall, according to another IPO survey, released by Stapleton Communications, a Mountain View, Calif.-based investor relations firm.

Almost 90 percent of the 200 technology companies surveyed by Stapleton said they had chosen the right underwriter for them. The Ernst & Young survey found that nearly 72 percent of the 474 responding companies were satisfied with the process.

However, when it comes to aftermarket support, companies in both surveys were less than pleased. Mavrinac said that many of the companies without aftermarket support didn't invest in IR. These companies fall into two categories: those that don't properly value IR and those that do but don't know how to engage IR strategies.

"[IR] is key in developing relationships with the investment banker and analysts," Mavrinac said, adding that the companies that do, generally pick-up coverage quickly.

"Today, companies, rightly or wrongly, expect underwriters to hold their hands a little bit after the IPO," said Stapleton President Deborah Stapleton. The survey found that in many cases, respondents felt their first research report was not as timely, comprehensive or positive as they would have liked.

"The IPO process has become a commodity," Stapleton added. "Every firm conducts the IPO process in basically the same way. What sets banking firms apart is their ability to place the stock with the sought-after long-term investor, and to be there to support the companies long after the deal is done."

While 90 percent of the respondents in the Stapleton survey believe that they chose the right underwriter, 81 percent wished they had conducted more research before their selection.

On average, the companies looked at 8.13 underwriters before their selection. The vast majority, 93 percent, said they had absolute confidence in their underwriter and were well prepared for the roadshow.

Ranked on a scale from one to five, underwriters got 4.34 for their overall support and commitment during the transaction, but that number slipped to 3.76 for their support and commitment after the transaction. The Stapleton survey gave an average rating of 3.60 to underwriters' ability to place shares with long-term investors. While companies named a strong research group as the top reason for choosing an underwriter, companies were also "underwhelmed" with the quality of research they received from firms in their IPO syndicate.

According to the Ernst & Young survey, the failure of managers to adequately prepare themselves and their employees for the responsibilities of public life may have some impact on their companies' long-term performance.

"Almost all 90 percent of our respondents report making some change in the company's policies and procedures," Mavrinac said. The most popular change, made by 90 percent of the companies before an IPO, was to create an IR strategy. And 68 percent reported making changes in their board structures, while 62 percent reported making changes in their executive-compensation systems.

Mavrinac said successful firms launched changes in their IR, internal-control systems, financial accounting, executive compensation and employee-incentive programs about one-and-a-half years prior to the IPO. The majority of "super successful" IPOs installed their IR strategy at least six months before the IPO, Mavrinac said.

When asked what they would do differently if they had a second chance, respondents' in the Stapleton survey concentrated on three main topics: timing, research and co-managers.

First, the old hats at the IPO process said they would focus more attention on understanding the underwriters' knowledge and background in a particular industry. Others said they would spend more time thinking about post-IPO events and changes to the business. Others believed the main issue is post-IPO support and the underwriters' ability to bring in additional market makers and liquidity for the stock.

Philip Scipio is senior editor at Investor Relations Business, a sister publication of Traders Magazine.

Instinet was once a sleepy U.S. domestic broker. Not anymore.

It now spans the globe, executing buy and sell orders electronically across international borders a far cry from the system first conceived as a computer network for institutions trading New York Stock Exchange-listed stocks.

Back in the early days, life was different. During Instinet's first 14 years, in fact, volume grew at a snail's pace. Then times suddenly changed. And in 1983, Instinet took the industry by storm when it began trading Nasdaq stocks. Business grew spectacularly.

Four years later, bigger changes were afoot. Instinet was acquired by Reuters Holdings PLC, the British news and information giant. Among the new owner's boldest moves: giving customers the ability to cross stocks anonymously with each other. That move worried Nasdaq.

Now, institutional accounts and others, trading with each other or directly with the broker, paid a commission to Instinet and part of the bid and asked spread, rather than the full spread made by the market maker.

Trading on Nasdaq was being partly disintermediated because investors could trade between the spread, and market makers were no longer making the difference between the bid and asked price on each trade. That didn't stop market makers using Instinet to lay off their positions, however.

Anonymity

When Instinet added anonymity in April 1989, some clients actually canceled their accounts. Anonymity meant that a trader could no longer avoid paying commissions on some orders.

Buying 25,000 shares, for example, the trader could no longer enter an order for 1,000 shares, wait and see who took the other side and then phone that party to trade the other 24,000 shares. (Instinet now charges pennies or less on shares of the U.S. trades it executes.)

Some say Instinet's maneuvers were prescient. Today, trading among customers between the bid and asked spread is explicitly approved under the Securities and Exchange Commission's order handling rule. What's more, anonymity and the lack of market impact are viewed as Instinet's main attraction to traders. Back in the 1980s, however, that caught Nasdaq off guard.

Nasdaq's parent, the National Association of Securities Dealers, fought back with its own private network, an upgraded SelectNet. Instinet now competes with Nasdaq for order flow, and reportedly accounts for 20 percent of Nasdaq volume, the equivalent of more than 100 million shares daily. Instinet enables a Nasdaq market maker or buy-side trader to select each stock's page on their Instinet terminal. The user can then anonymously hit a bid, enter an ask or negotiate with a buyer to raise the bid between the spread.

Two years ago, the last time reliable figures were available, Instinet had an estimated 5,200 customer terminals worldwide. In theory, Instinet is open for real-time trading 24 hours each day, 365 days a year. In practice, Instinet volume in a stock declines at night once that stock's primary market has closed, with activity surging during important world events.

Global Markets

Today, Instinet is taking on the global markets. A registered broker dealer in 16 countries, and correspondent relationships with brokers in others, Instinet trades in 40 markets. Foreign customers now account for an estimated 70 percent of Instinet's global business, up from 25 percent in 1992.

Instinet's fastest growing customer-segment is European fund managers trading securities across national borders, according to Doug Atkin, executive vice president of Instinet and chief executive of Instinet International.

These European managers use Instinet whenever they forego the primary markets to trade their stock on the international marketplace. Foreign customers account for about 75 percent of Instinet's global business, up from about 25 percent in 1992. "Instinet's global business will equal its U.S. business in three years," Atkin said.

The global push dates back to Instinet's acquisition by Reuters. The new parent's first move was to open an outpost in London to attract U.S equity order flow transacted out of London on SEAQ International, the lightly-registered screen-based wholesale market for broker dealers trading large amounts of foreign stock. SEAQ is run by the London Stock Exchange (LSE).

By 1992, Instinet embarked on another mission: establishing direct electronic connections to the major European exchanges, including exchanges in Paris, Frankfurt and Zurich. That meant clients could access the exchange floors directly. "The mid-sized U.S. broker dealer that wasn't a member, could use an Instinet terminal to execute overseas," Atkin said.

Next, Instinet gave foreign fund managers and brokers the ability to trade across national borders. Brokers could trade stocks not listed in their home country through a central source of liquidity, Instinet, as distinct from sending orders for the same stocks to brokers based in the primary markets.

On one terminal, the broker could access global markets and pay a commission, settling each trade using Instinet. Consequently, some say Instinet was bringing liquidity to the global markets. When the system can draw French and Asian customers to the Dutch market, "Instinet is a friend of the local broker," Atkin said. "It doesn't compete with their core business."

Crossing Sessions

Instinet International performs some crossing sessions. In the U.K., the cross is scheduled up to seven to eight times each month. The Japanese cross takes place every two weeks, or more frequently if necessary. Atkin views crosses as a natural extension of trading, but stresses that relying exclusively on crossing is a mistake.

That's because a major source of liquidity on international orders comes from trading upstairs. For example, with an order to buy one million shares, a client may send a piece to a French exchange, another to Instinet to buy from a natural counterparty and the balance upstairs, where an Instinet sales trader acting as an agent may find an institution willing to sell.

Another example involves lists of stocks traded across several markets. Instinet sometimes receives four or five lists or program trades daily, each valued at more than $20 million, executed by Instinet as an agent for a charge of perhaps ten basis points.

Recently, Instinet received a $500 million order from an Asian fund manger to trade more than 400 stocks across 25 markets. First, Instinet performed a pretrade analysis to determine which stocks would be most difficult to execute, and then filled the order. The client said it was one of his best trades, Atkin claimed. "That combination of local exchange-liquidity and the ability to trade upstairs is what's driving the business," he added.

Here's a peek at what's happening across the globe for Instinet:

Australia The land Down Under has one national exchange, the electronic-based Australian Stock Exchange. The Aussies, however, denied Instinet membership on its exchange two years ago because it didn't recognize Instinet as a broker dealer. That may be about to change. Instinet's Atkin said the current atmosphere for membership is more hospitable.

JAPAN Instinet hopes to join the Tokyo Stock Exchange within the next two years. Since other Asian markets do not allow electronic trading, Instinet operates in these markets like a conventional broker, communicating by telephone.

London Instinet competes with SEAQ on the LSE. SEAQ has about 50 registered international dealers making markets in international stocks.

(Foreign companies listing with SEAQ totaled about 1,000 in 1997, up from 550 in 1990. These include such large, liquid issues as General Motors, IBM, Royal Dutch Petroleum, Deutsche Bank and Siemens.)

On Oct. 20, 1997, Big Bang II thundered through London and trading in the U.K. was impacted. At the LSE previously a quote-driven dealer market an order-driven central electronic limit order book, the Stock Exchange Trading Service (SETS) was introduced. SETS is used for stocks in the FTSE 100, an index of the LSE's 100 top-performing stocks.

SETS plans to add 250 more stocks this year. An LSE spokesperson noted that a quote-driven market may be better for less liquid shares. The spokesperson added that there are no plans to expand SETS over the 350 largest stocks.

Atkin said that Instinet is the only broker dealer that provides customers with the ability to send orders directly to the SETS order book instead of by telephone.

How's Instinet business since the Oct. 20 bang? "Booming," gushed Atkin.

An Offshoot

International electronic trading is a consequence of the globalization of equity markets.

A Greenwich Associates' survey of more that 100 institutions in the U.S. revealed that the number using electronic systems to execute non-U.S. trades grew to eight percent in 1996, up from three percent the previous year. Sure, there are troubled economic spots that fund managers avoid.

Still, for growth and diversification, many have satisfied their portfolios outside the domestic markets and want more international trading action.

Buyside and sell-side traders use electronic trading systems to execute orders for foreign stocks, in part to minimize transaction costs.

Beside Instinet, other players on the international scene include New York-based ITG's POSIT, the Portfolio System for Institutional Trading, a crossing network jointly launched in 1987 by Los Angeles-based Jefferies & Company and BARRA, a California-based software and investment research firm. ITG typically forms alliances with local partners to penetrate foreign markets.