Instinet, the electronic brokerage arm of Nomura Holdings, has emerged as the sole execution services arm for its parent company as the Japanese brokerage giant carries out a $1 billion restructuring and cost-cutting plan.
In a move to cut costs and rein in duplication in its businesses, Nomura Holdings will shift its execution services for equities in the U.S., Europe, and Asia to Instinet's electronic agency brokerage. No changes will be made in Japan where Nomura continues to dominate the marketplace.
"The primary driver is that the markets are evolving. This is not a cyclical change but a secular change," said Jonathan Kellner, president of Instinet, North America in an interview with Advanced Trading. Kellner said this was a strategic decision that put Nomura ahead of other investment banks that are cutting back as well. "Over the last few years, we've been running two parallel environments," he noted. "There's clearly a cost savings opportunity to run one."
The move will resolve the uncertainty that's loomed over Instinet's future over the past year and a half. Sources say there had been speculation about whether the electronic agency broker was up for sale. Buy-side customers were concerned about Nomura's commitment to Instinet because of the overlapping businesses, sources suggested.
Nomura was running two competing execution services businesses - Nomura Securities International and Instinet - with two technology infrastructures, algorithmic trading suites, DMA platforms, dark pools and trading staff. In addition to people, who are expensive, there was duplication in technology. "There were two sets of algos and TCA and DMA and smart order routing. Then you've got lines to the exchanges and exchange memberships," said a source familiar with Instinet's operations. "There's just so many costs that go into that. Being able to rationalize that is a tremendous savings."
Three Pillars of Business
Under the new structure, execution services - including cash, electronic trading and programs - in the Americas, EMEA and Asia will migrate to Instinet, Nomura's independent agency broker. [Since Nomura is the 800-pound gorilla in Japan, it will continue to trade for clients there.]
Because Instinet is an agency broker that matches orders for clients but doesn't trade for its own account, products that require capital commitment - including flow and structured derivatives, Delta One, convertibles, prime services futures and options, ECM and syndication - will continue to be offered under the heading of Investor and Corporate Solutions products by Nomura.
Research will remain with Nomura and have an east-to-west flavor. Nomura's research clients transitioning to Instinet for execution will have full access to Nomura's equity research globally, the firm added.
However, there could be some fallout from the decision in terms of eliminating jobs and information technology.
Duplication of Trading Floors
Nomura Securities International built a large equities trading floor from scratch with 500 workstations. The 75,000 square foot floor, located in Wall Street's World Financial Center in lower Manhattan, opened in October of 2010. The firm also developed a suite of algorithms from scratch and went live with NXT Direct, a low-latency global execution platform over the past year. It also launched its own dark pool.
Meanwhile, Instinet operates its own 33,000 square-foot trading floor with 72 sales and trading positions in mid-town Manhattan. Kellner said Instinet has no plans to move into Nomura's space, so it's unclear what will happen to the Nomura floor. Kellner said he couldn't discuss people but noted, "We're going through a process of what opportunities are available for people."
According to today's New York Times, the brunt of the cuts will come from Nomura's operations in Europe, which will account for 45% of the cost savings, and the Americas, which will account for 21%. The bank said it would shave $450 million from personnel expenses, while additional cuts could result in savings by optimizing spending on information technology, according to the report.
Since Instinet has enough capacity going back to 12 billion share days in U.S. equities, the firm doesn't need to add more technology to handle volume that migrates from Nomura.
While Kellner wasn't specific about what would be done, he said that platforms and infrastructure would be merged under Instinet. "We've done analysis and we're going to continue. It has to make sense from a client perspective should we be running two dark pools or one."
Instinet's president maintains that buy side clients will benefit from the restructuring. "As a global agency broker, we are clearly, the largest now," said Kellner. I think our value proposition to clients becomes interesting," said Kellner, citing the agency only model plus the strength it gains with Nomura behind it. Another benefit, he adds, is the ability of people to consume research products from Nomura and compensate the firm through Instinet.
"For the buy side, there is no more uncertainty around Instinet. Instinet is here to stay and the agency model is here to stay and Nomura is committed to it," said Kellner. Buy side firms that committed to the firm by using Instinet's products such as the Newport EMS or its algorithms, have the comfort that nothing is going to happen with Instinet." .