European Bond CommissionFixed Income Markets & Electronic Trading

Michael Ezra

8 October 1999, Paris

APPENDIX E

Instinet - Equities

world’s largest agency broker active in over 40 markets world-wide 30 years of financial services industry experience market leader in electronic transaction services wholly owned by Reuters over 300,000 equity market transactions per day

Instinet - Business Model

Core Principals AnonymityAnonymity TransparencyTransparency NeutralityNeutrality These same principals lend themselves to

the bond markets

Dealer Access

IFIM System

IFIM Business

Client D

Client C

Client BClient A

Client EClient F

Client G

Client H

Local

Markets

Local

Markets

Local

Markets

Trading Functionality (Main View) “Market Level View”Of Top of Book (Best) Prices Per InstrumentOn the Instinet Fixed Income Service

“Market Level View”Top of book (best) prices per instrumentPrice / time priorityLists are customisable by the user

View of the BenchmarkInstruments Relevant tothe Market LevelsSelected

View of the benchmarkinstruments relevant tothe market levels selected

Client Can Customizeof Instruments and Easily Switch Between Them

Client can customise individual “pages” for classesof instruments and easily switch between them

“Order Book”Depth of Book Shows All Live Orders for aGiven Instrument Within the Instinet FixedIncome Service

This is the Work Area for Managing OrdersClient Can Have Multiple Copies WithDifferent Instruments Up At One Time

The System Supports Existing PricingConventions - e.g. “. xx ” Denotes Decimal

”

“Order Book”Depth of book Shows All Live Orders for aGiven Instrument Within the Instinet FixedIncome Service

This is the Work Area for Managing OrdersClient Can Have Multiple Copies WithDifferent Instruments Up At One Time

“Info” provides information relevant to order e.g.:“R” indicates “Revenue Book”“N” indicates negotiable order

Trading Functionality (Order Book)

Live orders in the system

The Application Can Calculatean Average Price on a Series ofOrders So That Clients Can

“Sweep the Book”

The Application Can Calculatean Average Price on a Series ofOrders So That Clients Can

“Sweep the Book”

“Reserve” Orders Can BeEntered With Part or All of theOrder “Shown” But Still Can BeExecuted Against In Its Entirety

In the Example Book to the Left,a Client Has Entered a “N” Non-Negotiable Order with a “R”Reserve Quantity that is NotShown in the Book (i.e. theOrder Size is Bigger than 10

Million Par Amount)

“Reserve” Orders Can BeEnteredOrder “Shown” But Still Can BeExecuted Against In Its Entirety

In the Example Book to the Left,a Client Has Entered a “N” Non-Negotiable Order with a “R”Reserve Quantity that is NotShown in the Book (i.e. theOrder Size is Bigger than 10

Million Par Amount)

fully electronic broker platform complete anonymity one counterparty broker desk actively incentivises liquidity aggressive “hit and take”; no quote obligations global access best of breed technology

Instinet Fixed Income Markets

A new brokerage model - Instinet

What are the issues now? Ownership: consortium (utility) vs for-profit vendor

supported solutions Name give-up or matched principal Quality of technology: Global or local access, how will the

service be delivered Quotation obligations or natural liquidity Cost of market access Breakdown of barriers or two tier models Market makers only or wider participation

Liquidity takers…participation or not?Issues relating to “buy-side” participation debate over the value of an investor franchise

intensifies amongst the banks costs of supporting the franchise escalate banks restructure their service offerings - margin

chasing fragmentation of market place

size and frequency of trades a two tiered market

effect on specialist services research; broker expertise

Market EvolutionOwnership - User-owned Vendor-supported systems

- Name give-up Matched principal

- Shareholders Execution control / “Board”

- Many counterparties One counterparty / netting

- Domestic Global

- Stand alone Integrated; Through processing

Anonymity

Control

Balance sheet,Risk Capital

Access

In-house development

- Professional sell-side Wider participation in future?Participation