DIVIDED WE FALL.
Adam Toms, chief executive officer at Instinet Europe Ltd explains why integration made sense
Are you pleased with how the integration has gone?
Yes, by and large we’re very happy with the way the migration has progressed. In Europe it took us about six months start to finish, from November to April, and we’re starting to see some very encouraging results. Our market share in Europe has nearly tripled, and globally we’ve seen significant increases in Asia and the US as well. For the first half of 2013, we were ranked number 8 on Markit MSA’s European cash equity and ETF broker league table for Customer Business (e.g., business filled by an executing broker for its customer, whether on exchange or internalised in the broker’s dark pool), just ahead of JP Morgan. This was measured while we were in the middle of the migration process so many clients had yet to be moved over to Instinet, which makes us quite hopeful about our future position.
What were the main drivers behind the integration?
The Nomura Group felt that the industry was in the midst of a true secular shift rather than just a cyclical bump in the road, which therefore required a fundamental rethinking of the way the group’s overall equities offering was structured. The aim was to be able to provide clients with the services they need in a sustainable manner. On the execution services side, this meant migrating the electronic trading operations of Nomura to Instinet under its agency umbrella. As a result, Instinet now offers both high and low touch trading, EMS, trade analytics, commission management, liquidity sourcing and access to Nomura’s research and deal flow. The only thing that we do not do is commit capital.
What has client retention been like?
We have been pleased that that the vast majority of Nomura’s execution services clients have migrated to Instinet, while at the same time the business from Instinet’s legacy clients has remained steady. And for that we are extremely grateful, since in Europe this required most of these clients to invest a not-inconsequential amount of time and energy in completing the paperwork necessary to begin trading with a new broker. That said, one of main benefits of this exercise for both Instinet and our clients is that it gave us the opportunity to have some meaningful conversations about the way they would like to be serviced, and we found that the majority want a separation of high- and low-touch services. This seems to be in contrast to where some in the industry are heading, with several firms now bundling everything together via a “mid-touch” or “one-touch” model. Based on what we’ve heard, however, the buyside by and large values the specific skillsets that the high-touch and electronic traders each bring to the table, and we feel that structuring our offering with this in mind can be a real point of differentiation for us.
Are you seeing a change in the way the buyside allocates commissions?
I think there’s a bit of a myth with regards to the ongoing contraction of research and execution providers. It’s true that many asset managers were forced to hone their broker lists during the worst of the financial crisis and just after, but from my perspective, we haven’t seen much meaningful change over the last 3-4 years. We are also seeing an increase and not a drop in the use of commission sharing agreements region-wide. Although the pace of adoption differs from one jurisdiction to the next, there is a real delineation now between execution and research throughout Europe. Regulation is one of the main drivers of this. For example, last November, in the UK, the Financial Conduct Authority helped create a clearer divide between the two by formally reminding asset managers of their obligation to manage any conflicts of interest between research and execution.
What has been the most challenging?
Given that Instinet’s agency-only model has not changed as a result of the migration, one of the bigger challenges was moving clients who associated high-touch block trading with capital facilitation. The vast majority of our clients were willing to give us a shot, however, and I think most have found that we are actually very capable of finding the other side of a difficult block order given our agency credentials.
The other primary challenge has been selling our enhanced high-touch model to the legacy Instinet clients. Instinet has by and large been known as an electronic trading shop, so this has been a huge rebranding exercise. I’ve personally spent quite a bit of time talking with clients about the unique way in which this model can work to their benefit since it is being offered on top of Instinet’s electronic platform, which I think is something that ultimately clients have understood and appreciated.
We also now provide access to Nomura’s research, primary activity and syndicated deals, which is a big difference from our former offering. In general, we’re trying to get people to think of us as being in a unique position in the market since we offer all of the benefits of an agency broker while at the same time providing many of the products and services normally associated with a bulge bracket.
What about convincing the personnel of the benefits of the integration?
While Instinet’s business model has not changed, this was a substantial change to our business mix and product offering. As a management team, one of our primary jobs was to explain to the staff what we were doing and why, since we needed their confidence and conviction to make this migration a success. We also wanted to make sure that we co-mingled legacy Internet and Nomura staff on the various desks. The end result is that the front office staffs from both firms have learned a great deal from each other about different products and services and how to best service clients, which has been a huge benefit to us overall.
What are the plans for the future?
For the foreseeable future, we will continue to focus on making sure that the former Nomura clients and legacy Instinet clients receive the service levels they’ve come to expect. If we do this properly, my hope is that this will be reflected in the league tables from firms like Greenwich, as there are marginal differences between the top players and we think we could soon be among those firms. We also want to continue to increase the amount of high touch flow we’re receiving from clients. We believe there is real room for growth here and have staffed our group accordingly, doubling our team in London to 12 European cash traders. Finally, we think there will be more opportunities for us as Nomura’s syndicate selling agent. The primary market is looking strong and the ground is now fertile for more IPOs to be launched. In the past few months we have acted as Nomura’s agent on Barclays accelerated book-build and the initial public offering (IPO) of Bpost, and we expect to see more activity of this nature in the near future.
I read you are thinking of moving into fixed income? Is that a possibility?
There are a few asset classes that look to be on the cusp of “electronification”, which should mean that many of the areas in which Instinet excels on the equities side will become more relevant to clients trading those instruments. We’ll continue to keep our eye on these trends and long term you may see us expand our multi-asset offering, but for the near- and mid-term we have plenty to focus on in the equities markets.BIOGRAPHY – As CEO of Instinet Europe Limited, Adam Toms is responsible for managing Instinet’s brokerage operations and business strategy in the EMEA region. Previously Toms served as global head of electronic trading at Nomura, which he joined following its acquisition of the European assets of Lehman Brothers. Prior to that, Toms was an equity trader at Barclays Global Investors in London.