Exhibit 99.1
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RISK FACTORS
You should carefully consider the risks described below and other
information contained or incorporated by reference in this prospectus before
making a decision to invest in our company. There may be additional risks that
we do not currently know of or that we currently deem immaterial based on the
information available to us. All of these risks may impair our business
operations.
Risks Related to Our Industry
Economic, Political and Market Factors Beyond Our Control Could Reduce
Demand for Our Services and Harm Our Business
We earn revenues primarily from securities brokerage and related
services and expect to continue to do so. The demand for these services is
directly affected by domestic and international factors that are beyond our
control, including economic, political and market conditions; unforeseen market
closures or other disruptions in trading; the availability of short-term and
long-term funding and capital; the level and volatility of interest rates;
currency exchange rates; and inflation. Any one or more of these factors may
contribute to reduced activity and prices in the securities markets generally.
The continuing economic downturn has led to decreasing trading volumes and
prices, decreased capital formation and a more difficult business environment
for us. These conditions may continue or worsen, which could have a material
adverse effect on our business, financial condition and operating results.
Decreases in Trading Volumes or Prices Could Harm Our Business and Profitability
Declines in the volume of securities trading and in market liquidity
generally result in lower revenues from our brokerage, research and related
activities. In addition, our revenues from trading outside the United States are
determined on the basis of the value of transactions (rather than the number of
shares traded), which are adversely affected by price declines. Our
profitability would be adversely affected by a decline in our revenues because a
significant portion of our costs are fixed. The continuing decline in trading
volumes and prices has had, and may continue to have, a significant adverse
effect on our business, financial condition and operating results. Our
competitors with more diversified business lines might withstand these decreases
better than we would.
We Operate in a Highly Regulated Industry, Which May Limit Our Activities
General
The securities markets and the brokerage industry in which we operate
are highly regulated. In our case, the impact of regulation extends beyond
"traditional" areas of securities regulation, such as disclosure and
prohibitions on fraud and manipulation by market participants, to the regulation
of the structure of markets. We are subject to regulation as a securities
broker, as an alternative trading system (ATS) and electronic communications
network (ECN), and as an operator of a clearing business for our own customers
and third parties. Many of the regulations applicable to us may have the effect
of limiting our activities, including activities that might be profitable, or
causing us to modify our business model in ways that may adversely affect our
revenues.
ATS Status
Neither the Instinet ATS nor the ATS of our newly acquired subsidiary,
Island, is currently required to register as a national securities exchange
under applicable U.S. securities laws. However, as the Island ATS and the
Instinet ATS are integrated over time, it is possible that our combined future
share of the average daily trading volume in specified securities or classes of
securities could result in an SEC determination that exchange registration is
necessary. In addition, Island filed an application in draft with the SEC staff
for registration as a national securities exchange on June 28, 1999, and this
draft application is still pending.
If the SEC were to require either or both of our two ATSs to register
as a national securities exchange, or if any of our subsidiaries were to
voluntarily register as a national securities exchange, we could become subject
to substantial additional regulation, which might reduce our operational
flexibility in ways that could have a material adverse effect on our business.
Among other consequences, we might also be required to comply with fair
representation or ownership requirements. These requirements could adversely
affect our operations and could also result in material limitations or
restrictions on Reuters equity interest in us or Reuters ability to exercise its
voting and other governance rights in the manner contemplated by our amended and
restated corporate agreement with Reuters.
Under our amended and restated corporate agreement with Reuters, in the
event the SEC seeks to require either or both of our ATSs to register as a
national securities exchange, we have agreed to take all commercially reasonable
actions to mitigate the effect of such actions on Reuters rights, including the
implementation of appropriate changes in our corporate structure and operations,
although we would not be required to take any action that would have a material
adverse effect on any material part of our business or its consolidated
financial condition or results of operations. In addition, neither we nor any of
our subsidiaries may voluntarily register as a national securities exchange
without the prior written consent of Reuters if such registration would
materially affect Reuters ability to exercise its voting and other rights
related to its ownership of our common shares. It is possible that Reuters could
withhold this consent even if our management determines that registration as a
national securities exchange would be beneficial to us or one of our
subsidiaries.
Quote Display and Execution Access in Listed Securities
Under Regulation ATS, an ATS meeting certain trading volume thresholds
during four calendar months in any six-calendar-month-period in securities for
which it displays quotation data must provide to a national securities exchange
or national securities association (which we refer to together as a
self-regulatory organization, or SRO) its best bid and offer data for those
securities and must provide other broker-dealers execution access to such
quotes. Instinet and Island currently provide all of their quotation data for
Nasdaq-quoted stocks to various SROs in order to comply with Regulation ATS.
However, Instinet and Island do not currently provide their quotation data for
US listed stocks to any SRO. Island has reached the ATS thresholds in four of
the last six calendar months in exchange-traded funds, which are US listed
stocks, reflecting the Nasdaq-100 Index, known as QQQs, the Dow Jones Industrial
Average Index, known as Diamonds, and the Standard & Poor's 500 Index, or SPYs,
and Instinet has reached these thresholds in SPYs. Instinet also expects to
reach these thresholds in QQQs as of November 1, 2002 and may reach these
thresholds in Diamonds as of December 1, 2002.
Under current SEC regulations, in providing quotation data for US
listed stocks to an SRO, our two ATSs would become subject to the rules of the
Intermarket Trading System (ITS) Plan. The NASD provides its ATS members the
ability to meet their Regulation ATS quote display and access requirements for
US listed stocks through a system commonly referred to as CAES/ ITS or
Intermarket. Instinet does not currently have connectivity established to the
CAES/ITS system or that of another SRO or the related functionality necessary to
comply with these display and access requirements.
The ITS Plan imposes restrictions on, among other matters, the timing
and location of quotation display and matching of orders. In this regard, the
ITS Plan imposes limitations and provides remedies with respect to transactions
by members of ITS participant markets that involve a "trade-through" of bids and
offers. A trade-through occurs when a market participant trades at a price that
is inferior to a price displayed in another market. The ITS Plan also imposes
certain requirements when market participants "lock" the market--display bids
and offers at prices that equal offers and bids from other market participants,
or "cross" the market--display bids that exceed offers or display offers that
are less than bids of another market participant, for a particular security.
Quotations in US listed stocks displayed on Instinet and Island frequently
"lock" or "cross" other markets. These ITS Plan requirements raise significant
technical and commercial issues for Instinet and Island.
Because Instinet is unable to provide quotation data for US listed
stocks to an SRO at the current time, Instinet has temporarily suspended trading
in SPYs in order to comply with applicable SEC regulations. Trading in SPYs
accounted for approximately 1.3% of our total US equity volumes and 0.5% of our
net transaction fee revenue from US equities in the first nine months of 2002.
Instinet may also have to temporarily suspend trading in QQQs and Diamonds in
the near future if we are unable to establish connectivity to the CAES/ITS
system before we reach the ATS thresholds for those securities. Trading in QQQs
accounted for approximately 2.8% of our total US equity volumes and 1.2% of our
net transaction fee revenue from US equities in the first nine months of 2002;
trading in Diamonds accounted for approximately 0.2% of our total US equity
volumes and 0.1% of our net transaction fee revenue from US equities in the
first nine months of 2002.
Instinet is currently working to establish functional connectivity to
the CAES/ITS system despite its concerns regarding the potential implications of
the restrictions imposed by the ITS Plan. Although we expect to do so by the end
of the fourth quarter of this year, we cannot assure you that Instinet will be
able to achieve connectivity in this timeframe, or at all. As a result, the
provision of quotes by Instinet through CAES/ITS could have a significant
negative impact on our trading volumes in the relevant securities and therefore
adversely affect our business, financial condition and operating results.
Because of its concerns regarding the ITS Plan restrictions, effective
September 23, 2002, Island discontinued the display of order information for
QQQs, Diamonds and SPYs, although it still permits subscribers to trade those
securities on a non-displayed basis. Since September 23, 2002, Island's market
share in QQQs has declined from approximately 35-40% to approximately 20-25%; in
Diamonds, Island's market share has declined from approximately 35% to
approximately 15-20%; and in SPYs, Island's market share has declined from
approximately 20-25% to approximately 10-15%. These declines in market share may
have a negative impact on our financial results or our business. Island is
currently exploring alternatives to enable it to provide quotation data for US
listed stocks in compliance with the requirements of the ATS, including limited
participation in CAES/ITS. However, we cannot assure you that it will find a
viable alternative or that it will do so in a manner that will avoid an adverse
effect on our business, financial condition and operating results.
Instinet and Island have been engaged in discussions with the SEC
regarding these issues but have been unable to reach a satisfactory resolution
of the relevant commercial and regulatory issues. We intend to continue to work
on solutions to these issues and to discuss the quotation display requirement
and alternatives to our participation in CAES/ITS with the SEC; however, we are
unable to predict the outcome of these discussions.
Structural Developments in the Markets in Which We Operate May Place Us at a
Competitive Disadvantage
The structure of the Nasdaq stock market is currently undergoing a
fundamental change. Nasdaq's SuperSoes order execution system is being
incorporated into and replaced by a new trading platform for Nasdaq, generally
referred to as SuperMontage, which Nasdaq began to roll out on October 14, 2002.
SuperMontage incorporates enhanced functionality, including the display of more
quotation information. The implementation of SuperMontage could cause us to
receive fewer orders in Nasdaq-quoted stocks and also could cause fewer of the
orders we receive to be executed in our liquidity pool. The Instinet ECN
currently provides its customers with order-routing access to SuperMontage, but
it has begun to display customer orders for some stocks by posting quotations in
the NASD's alternative display facility (ADF) instead of SuperMontage and plans
to continue shifting quotations to the ADF as it opens to additional stocks. The
Island ECN currently displays its customer orders in Nasdaq-quoted stocks by
posting quotations on the Cincinnati Stock Exchange (CSE) and not on
SuperMontage or in the ADF. Instinet's participation in SuperMontage only for
order routing and not for order display may have a significant negative impact
on Instinet's order flow or other business related to its Nasdaq-quoted stocks.
We are unable to predict accurately at this time the impact SuperMontage will
have on our business, financial condition and operating results.
The NASD is currently operating a pilot ADF to display quotations and
collect trade data in a limited number of stocks for market participants (such
as ECNs) trading other than on a registered securities exchange or Nasdaq. The
ADF is intended to provide an alternative to Nasdaq's SuperMontage facilities
for meeting quotation display and trade reporting requirements. The Instinet ECN
has begun to participate in the ADF pilot program, but the ADF is not yet fully
operational and has never been tested in full-scale operation. As a result, our
work to complete technical integration with the ADF is incomplete. We cannot
assure you that the ADF will provide a fully operational alternative to
SuperMontage or that the ADF will prove to be a commercially viable facility. We
also cannot assure you that our technical integration with the ADF will be
successful or that its functionality will prove acceptable to our customers. If
the Instinet ECN is unable to use the ADF to meet its regulatory requirements
when SuperMontage becomes fully operational, in order to avoid disruption to our
equity trading business, we may have to consider possible alternatives that
could be adverse to our business, including participation in SuperMontage.
Because of the rules, fees and functionality of SuperMontage, our participation
in SuperMontage could have a significant negative impact on our market share and
trading volumes of Nasdaq-quoted stocks.
In addition, the rules, fees, and functionality of the ADF could place
us at a commercial disadvantage to our competitors. For example, the ADF does
not provide for order execution or routing services. As a result, ADF market
participants themselves are required to provide NASD member broker-dealers with
electronic access, either directly or indirectly, to their quotations, which
could create additional costs for those participants. The current ADF fee
structure contains certain features that could cause fees to fall
disproportionately on ECNs, further increasing costs for some participants
(including the Instinet ECN). We are unable to predict accurately at this time
the impact the NASD's ADF or the participation in it by the Instinet ECN will
have on our business, financial condition and operating results.
Our Business May Be Affected by SEC Actions Relating to ECNs
General
The SEC regularly considers a variety of regulations or interpretative
initiatives with respect to the structure of the equity securities markets,
including initiatives intended to reduce fragmentation, create a national
consolidated limit order book, and integrate ECNs and ATSs into the national
market systems. Future SEC rulemakings or interpretations in this area could
adversely affect our business, financial condition and operating results.
Access Fees
The SEC is currently considering, and we are periodically in
discussions with it regarding, other important issues, such as the fees
(including subscriber and non-subscriber access fees) ECNs charge, the levels of
those fees, the circumstances in which access fees may be changed and the
criteria for customers' access to an ECN's system and the requirements of
Regulation ATS. For example, the SEC has, at times, approved rules or issued
interpretations that directly govern how we determine prices for different types
of customers and services. Future SEC rules or interpretations regarding any of
these issues could have a significant and material adverse impact on our equity
securities business. We are currently discussing the application of those rules
to our past and future pricing policies with the SEC and some of our customers,
and we are unable to predict the outcome of these discussions. Any resulting
adjustment to our past pricing could have a material adverse effect on our
business, financial condition and operating results. We also continue to
evaluate our services and the fees we charge for them. The Instinet ECN
implemented a new pricing policy that took effect on August 1, 2002, and The
Island ECN implemented a new pricing policy that took effect on September 5,
2002. The Island ECN has also announced a further change in pricing that will
become effective on October 21, 2002. The Island ECN has received a subpoena
from the SEC for information regarding Island's subscriber policies, including
pricing, in connection with an investigation by the SEC of possible violations
of Regulation ATS by certain ECNs. We currently do not know the intended scope
or primary objectives of this investigation and cannot predict its outcome, but
it could have a significant adverse effect on our equity securities business.
Market Data Revenue
The SEC has also taken recent action with respect to market data
revenue sharing programs. In the past, the Island ECN has earned market data
revenues by participating in market data revenue sharing programs provided by
Nasdaq and the CSE. Market data revenues consist of a portion of the fees that
exchanges and Nasdaq receive for selling quotation and transaction data to
independent market data providers and market participants such as
broker-dealers. Market data revenues represented approximately 5% and 14% of
Island's total revenues for 2001 and the first three months of 2002,
respectively. For the first three months of 2002, these revenues were offset in
part by market data rebates that Island paid to some of its customers, which
represented approximately 8% of Island's expenses for the period. On July 2,
2002, the SEC announced that it had abrogated proposals that were submitted by
several markets, including Nasdaq and the CSE, to continue certain of their
market data revenue sharing programs. As a result, the Nasdaq and the CSE
revenue sharing programs from which Island has earned most of its market data
revenues were suspended, and Island suspended its market data revenue sharing
program. Some market data revenue sharing programs for exchange-listed
securities, which represented a substantial portion of Island's market data
revenues, were subsequently reinstated. The CSE has submitted a proposal to
share a reduced proportion of the market data revenues it receives (50% instead
of 75%) in Nasdaq-quoted securities. The SEC, however, has not taken any action
on this or any other market data revenue sharing programs for Nasdaq securities,
and we cannot assure you that the SEC will approve any of them. In addition, we
cannot assure you that the market data revenue sharing programs for
exchange-listed securities will continue or remain in their current form. As a
result, we cannot assure you that Island will continue to earn market data
revenues or, if it does, the level of those revenues in the future. We also
cannot predict the impact of the suspension of Island market data revenue
rebates sharing on Island's business, financial condition and operating results.
In addition, the Island ECN has received a subpoena from the SEC for information
regarding trading and market rebate practices with respect to some of Island's
market data revenue rebate programs, in connection with an investigation by the
SEC of customer trading practices in some exchange-traded funds. We currently do
not know the intended scope or primary objectives of this investigation and
cannot predict its outcome, but it could have a significant adverse effect on
our equity securities business.
Regulatory Changes Could Adversely Affect Our Business
The securities industry generally has been and is subject to continuous
regulatory changes, including changes in the rules of the SEC and of
self-regulatory organizations such as the NYSE and the NASD. In the future, the
industry may become subject to new regulations or changes in the interpretation
or enforcement of existing regulations. We cannot predict the extent to which
any future regulatory changes may adversely affect our business. Although
regulatory changes can affect all aspects of our business, the markets for
equity securities have been subject to the most significant regulatory changes.
Our activities as an agency broker in equity securities are the principal source
of our revenues and profits.
Recent and proposed regulatory changes that have had or could have a
significant effect on our equity securities business include the following:
o The introduction of decimalization in April 2001-- the quoting of stock
prices in dollars and cents rather than in dollars and fractions of a
dollar (such as 1/8 or 1/16)-- has had, and may continue to have, a
negative effect on the profitability of our broker-dealer customers,
which has resulted, and may continue to result, in our receiving fewer
orders from those customers. Decimalization has also reduced, and may
continue to reduce, our order flow by increasing the likelihood that
traditional broker-dealer firms will try to execute orders internally
rather than route them to external market centers for execution. In
addition, the negative effect on broker-dealer profitability has
resulted, and may continue to result, in some market makers moving from
a business model in which they trade as principal for their own account
to an agency business model, which may increase the competition we face
from market makers .
o The SEC's recently expanded interpretation of Section 28(e) of the
Exchange Act allowing institutional investors to generate "soft-dollar"
credits -- by allocating a portion of their gross brokerage transaction
fees for research and other brokerage services -- from certain
transactions executed through broker-dealers on a "riskless" principal
basis, rather than only on an agency basis (which is how we execute
transactions), could increase competition for those customers in our
equity brokerage business.
o Changes in the ITS Plan, such as restrictions on our access to the
system, the rules applicable to participation in the system, the
threatened withdrawal of the NYSE from the system or the elimination of
the system in its entirety, could adversely affect our ability to
attract business in exchange-listed stocks.
o The SEC has implemented rules requiring many market participants,
including us, to make detailed public disclosure regarding orders in
equity securities and order routing practices. We cannot predict what
impact these rules will have on the number and size of orders we receive
from customers.
o The NYSE's rule change allowing its member firms to execute transactions
in NYSE-listed stocks during market hours off the floor of the NYSE
could reduce our order flow in NYSE-listed stocks if traditional
broker-dealers execute orders in market centers other than ours.
o The NASD has adopted changes in its fee structure effective October 1,
2002 that will impose a fee on all transactions in Nasdaq-quoted stocks
regardless of where those transactions occur. In addition, in order to
assess this fee, the NASD will require NASD members not using Nasdaq's
Automated Confirmation Transaction (ACT) service to report on a monthly
basis aggregate information regarding their transactions in
Nasdaq-quoted stocks to the NASD. Instinet is establishing a new
mechanism for satisfying these reporting requirements. We are unable to
predict what impact these fee changes and required reporting would have
on our business.
o The SEC's Division of Market Regulation has issued a series of
"no-action" letters to us and Island over a number of years verifying
and extending the status of Instinet and Island as ECNs. The most recent
"no-action" letters are valid until January 6, 2003. In addition, on
October 11, 2002, we received a separate "no-action" letter for the
Instinet ECN's participation in the NASD's ADF, which is also valid
until January 6, 2003. The Division's "no-action" positions are subject
to our continuing to satisfy certain conditions, including those
regarding our systems capacity, fair access for participants and a
limitation on our maximum fees. See "Risks Related to Our Business --
Insufficient Systems Capacity or Systems Failures Could Harm Our
Business." Our recent acquisition of The Island ECN may also affect the
Division's view of both businesses. We are in discussions with the
Division from time to time regarding these issues, and we cannot assure
you that the Division will continue to extend its "no-action" positions.
An adverse change in any of the Division's positions could interfere
with our ability to act as an ECN or participate in the ADF and thereby
have a material adverse effect on our business, financial condition and
operating results. Island is also currently seeking a "no-action" letter
that extends the SEC's current no-action position regarding Island's
participation in all markets, including Nasdaq, the CSE and the ADF, as
an "ECN Display Alternative" for market makers posting their limit
orders on The Island ECN. If Island does not receive this "no-action"
letter, it could have a negative effect on our business, financial
condition and operating results.
International Regulation Could Adversely Affect Our Business
The financial services industry, including the securities brokerage
business, is heavily regulated in many jurisdictions outside the United States.
We are required to comply with the regulatory regime of each country in which we
conduct business, as well as the regulations of each exchange of which we are a
member. The varying requirements of these jurisdictions may adversely affect our
business or limit our ability to expand our international operations. We may not
be able to obtain the necessary regulatory approvals for planned expansion; if
approvals are obtained, they may impose restrictions on our business; or we may
not be able to continue to comply with the terms of the approvals or applicable
regulations. In addition, in many countries, the regulations applicable to the
securities and financial services industries are uncertain and evolving, and it
may be difficult for us to determine the exact regulatory requirements. Our
inability to remain in compliance with regulatory requirements in a particular
jurisdiction could have a materially adverse effect on our operations in that
market and on our reputation generally. Changes in regulations or changes in the
interpretation or enforcement of existing regulation outside the United States
may adversely affect our business, financial condition and operating results.
We Face Substantial Competition that Could Reduce Our Market Share and Harm Our
Financial Performance
The financial services industry generally, and the securities brokerage
business in which we engage in particular, is very competitive, and we expect
competition to intensify in the future. Many of the financial service providers
with which we compete are well-capitalized and substantially larger than we are
and have substantially greater financial, technical, marketing and other
resources. Many of them offer a wider range of services, have broader name
recognition and have larger customer bases than we do. Some of them may be able
to respond more quickly to new or evolving opportunities, technologies and
customer requirements than we can and may be able to undertake more extensive
promotional activities. Consolidation and alliances within the industry have
resulted, and may continue to result, in increasingly intense competition.
Outside the United States, in addition to our U.S. competitors with
international capabilities, we compete with non-U.S. banks and other financial
institutions that may also have long-standing, well-established and, in some
cases, dominant positions in their trading markets. If we are not able to
compete successfully in the future, our business, financial condition and
operating results could be adversely affected.
We compete with Nasdaq as a trading venue for Nasdaq-quoted stocks. The
NASD regulates the activities of our U.S. broker-dealer subsidiaries, has a
significant ownership interest in Nasdaq and owns the NASDR, which regulates and
polices the Nasdaq market. The NASD, either directly or through these
subsidiaries, is thus able to propose, and often obtain, SEC approval of rule
changes that we believe can be to Nasdaq's competitive benefit as a securities
marketplace and our competitive disadvantage.
A number of our competitors have applied for status as a national
securities exchange, and one has been approved to serve as a facility of an
exchange. Competitors that receive status as national securities exchanges, or
that enter into arrangements to operate as facilities of national securities
exchanges, will gain direct access to the National Market System and the ITS,
which will enable them to publicly display orders in NYSE-listed stocks and make
those orders available for execution. In addition, these exchanges will become
self-regulatory organizations, no longer subject to NASD regulations. Nasdaq has
also applied for status as a for-profit exchange. By operating as an exchange
with SuperMontage as its trading platform, Nasdaq is continuing to evolve as a
direct competitor of ATSs, including Instinet and Island, which could negatively
impact our business, financial condition and operating results. Nasdaq is
currently considering the fee structure it would introduce as an independent,
for-profit exchange. We are unable to predict what fee changes Nasdaq might
propose or eventually implement, but Nasdaq's fee structure may adversely affect
our business, financial condition and operating results.
We have experienced intense price competition in our equity securities
business in recent years. Some of our competitors may have more modern
technology and a broader range of services and, therefore, may be able to offer
brokerage services to customers at lower prices than we can. As a result of this
price competition, we have experienced a decline in both market share and
revenue and have aggressively reduced pricing for our U.S. broker-dealer
customers. We anticipate that these pricing changes will cause the transaction
fee revenue we receive from this customer group to decline significantly, even
if their volumes increase. As a result of these pricing changes, we have taken,
and will continue to take, actions to reduce costs, which may include reducing
our staff levels and restructuring some of our non-core businesses, among other
alternatives. Largely as a result of these pricing changes and a restructuring
charge related to our cost reduction actions, we reported a net loss of $34.7
million, or $0.14 per share, for the first quarter of 2002. For the second
quarter of 2002, we reported a net loss of $59.9 million, or $0.24 per share. We
expect intense competition to continue, and if it does so or intensifies, we
could lose further market share and revenue.
Our Inability to Manage the Risks of International Operations Effectively Could
Adversely Affect Our Business
We have operations in Europe and Asia, and there are a number of risks
inherent in doing business in international markets, including the following:
o less developed technological infrastructures and generally higher costs,
which could result in lower customer acceptance of our services or
customers having difficulty accessing our electronic marketplace;
o less automation in clearing and settlement systems, resulting in higher
expenses and increased operational difficulties (including an increased
risk of transactional errors and failure to complete customers'
transactions);
o difficulties in recruiting and retaining personnel, and managing
international operations;
o reduced protection for intellectual property rights;
o seasonal reductions in business activity during the summer months; and
o potentially adverse tax consequences.
Our inability to manage these risks effectively could adversely affect
our business, financial condition and operating results.
Our international operations also expose us to the risk of fluctuations
in currency exchange rates. If our risk management strategies relating to
exchange rates prove ineffective, we could suffer losses that would adversely
affect our business, financial condition and operating results.
Regulatory Net Capital Requirements Could Adversely Affect Our Ability to
Continue to Conduct or Expand Our Business Operations or to Pay Dividends
Our broker-dealer subsidiaries are subject to stringent rules with
respect to the maintenance of specific levels of net capital by regulated
broker-dealers, including the SEC's net capital rule. The failure by one of
these subsidiaries to maintain its required net capital may lead to suspension
or revocation of its registration by the SEC and its suspension or expulsion by
the NASD or other U.S. or international regulatory bodies, and ultimately could
require its liquidation. In addition, changes in net capital regulation or a
significant operating loss or any unusually large charge against the net capital
of one of our broker-dealer subsidiaries could limit its operations,
particularly those, such as correspondent clearing, that are capital intensive.
A large charge to the net capital of one of these subsidiaries could result from
an error or other operational failure or a failure of a customer to complete one
or more transactions, including as a result of that customer's insolvency or
other credit difficulties. Our inability to maintain our present levels of
business or to expand as a result of the net capital rules could have a material
adverse effect on our business, financial condition and operating results. The
net capital rules also could restrict our ability to withdraw capital from our
broker-dealer subsidiaries, which could limit our ability to pay cash dividends,
repay debt or repurchase shares of our outstanding stock.
Risks Related to Our Business
Insufficient Systems Capacity or Systems Failures Could Harm Our Business
We are heavily dependent on the capacity and reliability of the
computer and communications systems supporting our operations. Heavy use of our
computer systems during peak trading times or at times of unusual market
volatility could cause our systems to operate slowly or even to fail for periods
of time. We also cannot assure you that our recent headcount reductions as part
of our cost-cutting initiatives will not impact our ability to respond to system
problems. Our status as an SEC-recognized ATS requires that our trade execution
and communications systems be able to handle anticipated present and future peak
trading volumes. In addition, the status of our subsidiaries as SEC-registered
broker-dealers and NASD members is conditioned in part on their ability to
process and settle trades. If any of our systems do not operate properly or are
disabled, that ability could be compromised and we could suffer financial loss,
liability to clients, regulatory intervention or reputational damage.
To accommodate estimated potential increases in order message volume
and trading volume, including as a result of the growth in our business, the
trading practices of new and existing clients, the development of new and
enhanced trading system functionalities, sub-penny pricing, regulatory changes
such as decimalization and the commencement of operations of SuperMontage, we
have made and will continue to make significant investments in additional
hardware and software. We cannot assure you that our estimates of future trading
volumes and order messages will be accurate or that our systems will always be
able to accommodate actual trading volumes and order messages without failure or
degradation of performance. System failure or degradation could result in
regulatory inquiries or proceedings, and could also lead our customers to file
formal complaints with industry regulatory organizations, file lawsuits against
us, trade less frequently through us or cease doing business with us altogether.
In connection with its annual examination of the capacity of market
participants, the SEC's Division of Market Regulation has from time to time
raised issues regarding the adequacy of our capacity, our testing of capacity
limits and our plans for increasing capacity. The inability of our systems to
accommodate an increasing volume of transactions and order messages could also
constrain our ability to expand our businesses.
In the past, we have experienced periods of extremely high trading
volume in the equity securities markets. On a few occasions during these
periods, the volume of trading activity has caused a slowing of our trade
allocation and related systems. Sustained periods of high trading volumes in the
past have enabled us to identify specific areas of vulnerability in our
transaction processing systems. These or similar events could interfere with our
customers' ability to settle trades through us or prevent us from satisfying our
responsibilities to clearing and settlement organizations and could result in
financial exposure or regulatory action. We have been addressing each of these
areas and upgrading our systems as necessary, but we cannot assure you that a
similar slowing of our trade allocation systems will not occur again in the
future.
As a result of the September 11 terrorist attacks, we lost one of our
three core data centers, which had been located in the World Trade Center. The
remaining two core data centers support our trading and execution systems,
clearing and settlement operations and customer interfaces. If one of these
remaining data centers were to be damaged, disabled or otherwise fail or
experience difficulties, it may be more difficult for us to continue operating
without disruption to our services.
Our electronic systems could be adversely affected by general power or
telecommunications failures, computer viruses or natural or other disasters
(including terrorist attacks). They are also vulnerable to damage or failure due
to human error and sabotage (both external and internal). The loss of support
services from third parties could also have a material adverse effect on our
electronic systems.
Shifts in Our Business Mix May Decrease Our Profitability and Net Income
Changes in the mix of customers we serve (large institutional
investors, portfolio managers, hedge funds and broker-dealers) and in the use of
our trading system by our customers can materially affect our profitability and
net income. A substantial portion of our trading volume is derived from our
broker-dealer customers. In the second half of 2001, we experienced a
significant decline in volumes from these customers, resulting in lower market
share, particularly for Nasdaq-quoted shares. A shift in our customer mix toward
fewer broker-dealers or a further decline in the use of our trading system by
broker-dealers could reduce the depth and breadth of our liquidity pool, which
could reduce its attractiveness to our customers and adversely affect our
trading volumes, operating results and financial condition.
If We Fail to Introduce New Services and Service Enhancements and Adapt Our
Technology in a Timely Manner, We May Be Unable to Compete Effectively
Our business environment is characterized by rapid technological
change, changing and increasingly sophisticated customer demands and evolving
industry standards. If we are unable to anticipate and respond to the demand for
new services, products and technologies on a timely and cost-effective basis and
to adapt to technological advancements and changing standards, we will be less
competitive, which could have a material adverse effect on our business,
financial condition and operating results. In addition, new services that we may
develop and introduce may not achieve market acceptance.
Decreases in Our Average Transaction Size Have Reduced, and May Continue to
Reduce, Our Profitability on a Per Transaction Basis
In recent years, although the number of customer transactions in U.S.
equity securities that have been executed through our systems has increased, the
average size of those transactions has declined, decreasing from 1,575 shares
per transaction in 1996 to 782 shares per transaction in 2001. This decline has
caused our average revenue per transaction to decrease. As a result, our
profitability and margins on a per transaction basis have decreased. We expect
average revenue per transaction to continue to decline in the future.
Our Inability to Adjust Our Cost Structure If Revenues Decline Suddenly Could
Adversely Affect Our Results
Our expense structure is based on historical expense levels and
historical and expected levels of demand for our services. If demand for our
services and our resulting revenues should decline suddenly (as occurred in the
second half of 2001 and the first quarter of 2002), we may be unable to adjust
our fixed cost base on a timely basis, which could have a material adverse
effect on our operating results and financial condition.
Costs Related to Our New Business Development Efforts and Investments in
Technology May Continue to Adversely Affect Our Profitability and Net Income
Our net income declined in 1999 from 1998 and has remained below the
1998 level. These results are due in part to the significant costs associated
with our efforts to strengthen, expand and diversify our business and enhance
our technology since 1998. Our new business activities, the expansion of our
services and technological innovations may require significant expenditures over
long periods of time before they generate substantial revenues. Unless and until
these activities generate revenues proportionate to these expenditures, our
operating margins and profitability will be adversely affected.
We Depend on Our Executive Officers and Key Personnel
Our future success depends, in significant part, upon the continued
service of our executive officers, as well as various key sales, trading and
technical personnel. The loss of these key people could have a material adverse
effect on our business, financial condition and operating results. We also
cannot assure you that our recent management changes and headcount reductions
will not have a material adverse effect on our business, financial condition and
operating results.
Our future success also will depend in significant part on our ability
to recruit and retain highly skilled and often specialized individuals as
employees, particularly in light of the rapid pace of technological advances.
The level of competition in our industry for people with these skills is
intense, and from time to time we have experienced losses of key employees.
Significant losses of key personnel, particularly to other firms with which we
compete, could have a material adverse effect on our business, financial
condition and operating results.
We May Have Difficulty Managing Our Growth Effectively
We have experienced significant growth in our business activities over
the last five years including: our expansion in international markets and
business initiatives, such as our correspondent clearing operations. This growth
has placed, and is expected to continue to place, a significant strain on our
management and resources.
Our growth required increased investment by us in facilities,
personnel, and financial and management systems and controls. It also has
required expansion of our procedures for monitoring and assuring our compliance
with applicable regulations, and we needed to integrate, train and manage our
employee base. Our expansion in recent years has increased our need for internal
audit and monitoring processes that are more robust and broader in scope than
those we have historically required. We may not be successful in implementing
all of the processes that are necessary. Unless our growth results in an
increase in our revenues that is proportionate to the increase in our associated
costs, our operating margins and profitability will be adversely affected.
Financial or Other Problems Experienced by Third Parties, Including Customers,
Trading Counterparties, Clearing Agents and Exchanges, Could Have an Adverse
Effect on Our Business
We are exposed to credit risk from third parties that owe us money,
securities or other obligations. These parties include our customers, trading
counterparties, clearing agents, exchanges and other financial intermediaries.
These parties may default on their obligations to us due to bankruptcy, lack of
liquidity, operational failure or other reasons. Although we believe we have no
obligation to do so, we generally settle trades with a counterparty even if our
customer fails to meet its obligations to us.
We are exposed to substantial credit risk from both parties to a
securities transaction during the period between the transaction date and the
settlement date. This period is three business days in the U.S. equities markets
and can be as much as 30 days in some international markets. In addition, we
have credit exposure that extends beyond the settlement date in the case of a
party that does not settle in a timely manner by failing either to make payment
or to deliver securities. Adverse movements in the prices of securities that are
the subject of these open transactions can increase our credit risk. Credit
difficulties or insolvency or the perceived possibility of credit difficulties
or insolvency of one or more large or visible market participants could also
result in market-wide credit difficulties or other market disruptions whereby a
large number of market participants may not settle transactions or otherwise
perform their obligations. Credit losses could adversely affect our financial
condition and operating results.
We May Have Difficulty Managing Our Acquisition of Island and Our Other
Acquisitions Successfully
To achieve our strategic objectives, we have acquired or invested in,
and in the future may seek to acquire or invest in, other companies or
businesses. We cannot assure you that we will realize, when anticipated or at
all, the benefits we expect as a result of our acquisitions, including our
acquisition of The Island ECN. Achieving the benefits of our acquisitions will
depend on many factors, including the successful and timely integration and, in
some cases, the consolidation of products, technology, operations and
administrative functions, of two companies that have previously operated
separately. Considering the highly technical and complex nature of our and
Island's products, these integration efforts may be difficult and time
consuming. In addition, we may choose not to integrate some portions of
Instinet's and Island's business, which may result in lower cost savings.
Acquisitions entail numerous other risks, including the following:
o difficulties in the assimilation of acquired operations and products;
o diversion of management's attention from other business concerns;
o failure of our combined management to oversee and manage newly acquired
companies effectively;
o assumption of unknown material liabilities;
o failure to integrate successfully any operations, personnel, services or
products that we acquire;
o failure to achieve financial or operating objectives;
o failure to implement adequate compliance and risk management methods for
new operations;
o impairment of certain acquired intangible assets, which would reduce
future reported earnings; and
o potential loss of customers or key employees of acquired companies.
Failure to manage our acquisitions to avoid these risks could have a
material adverse effect on our business, financial condition and operating
results.
We May Have Difficulty Managing Our Joint Ventures and Alliances Successfully
We seek to expand or enhance some of our operations from time to time
by forming joint ventures or alliances with various strategic partners
throughout the world. Entering into joint ventures and alliances entails risks,
including:
o difficulties in developing and expanding the business of newly formed joint
ventures;
o exercising influence over the activities of joint ventures in which we do
not have a controlling interest; and
o potential conflicts with our joint venture or alliance partners.
Unsuccessful joint ventures or alliances could have a material adverse
effect on our business, financial condition and operating results.
Our Compliance Systems Might Not Be Fully Effective
Our ability to comply with all applicable laws and rules is largely
dependent on our establishment and maintenance of compliance, audit and
reporting systems and procedures, as well as our ability to attract and retain
qualified compliance, audit and risk management personnel. We cannot assure you
that these systems and procedures are fully effective. We also cannot assure you
that our recent headcount reductions as part of our cost-cutting initiatives
will not reduce the effectiveness of these systems and procedures. We face the
risk of significant intervention by regulatory authorities, including extensive
examination and surveillance activity. In the case of actual or alleged
non-compliance with regulations, we could be subject to investigations and
judicial or administrative proceedings that may result in substantial penalties
or civil lawsuits, including by customers, for damages, which can be
substantial. Any of these could adversely affect our business, reputation,
financial condition and operating results and, in extreme cases, our ability to
conduct our business or portions thereof.
Our Risk Management Methods Might Not Be Fully Effective
Our policies and procedures to identify, monitor and manage our risks
may not be fully effective and may vary among our various businesses and
subsidiaries worldwide. Some of our risk management methods depend upon
evaluation of information regarding markets, customers or other matters that are
publicly available or otherwise accessible by us. That information may not in
all cases be accurate, complete, up-to-date or properly evaluated. The new
business initiatives that we have recently launched or acquired, such as our
correspondent clearing operations and the activities of our ProTrader
subsidiary, may require different oversight procedures than those we have
employed in the past. We cannot assure you that our recent headcount reductions
as part of our cost-cutting initiatives will not reduce the effectiveness of our
risk management policies and procedures. If our policies and procedures are not
fully effective or we are not always successful in monitoring or evaluating the
risks to which we are or may be exposed, our business, reputation, financial
condition and operating results could be materially adversely affected. In
addition, although we maintain insurance policies consistent with those
maintained by others in the securities industry, we cannot assure you that our
insurance policies will provide adequate coverage.
We May Not Be Able to Obtain Additional Financing If We Need It
Our business is dependent upon the availability of adequate funding and
regulatory capital under applicable regulatory requirements. Historically, we
have satisfied these needs from internally generated funds and from lines of
credit made available to us by commercial banking institutions. Prior to our
initial public offering, Reuters had issued non-binding, short-term letters to
certain of these institutions confirming its ownership of us and indicating that
if we were to default under the relevant facility, Reuters would consider,
without any obligation, requests by these institutions for compensation. Reuters
has withdrawn these letters and advised us that it will not issue any additional
letters in the future, and we will thus not have the benefits of these letters.
Based on management's experience and current industry trends, we
anticipate that our available cash resources (including the remaining proceeds
from our recent initial public offering) will be sufficient to meet our
presently anticipated working capital and capital expenditure requirements for
at least the next 12 months. However, if for any reason we need to raise
additional funds, we may not be able to obtain additional financing when needed
on terms favorable to us. In addition, so long as Reuters owns a majority of our
common stock, we will need Reuters consent to incur net indebtedness
(indebtedness for borrowed money less cash on hand) in excess of an aggregate of
$400 million, excluding any indebtedness incurred by us in the ordinary course
of our brokerage or similar business or in connection with our clearing of
securities trades or our obligations to securities exchanges or clearing
systems. We cannot assure you that we will receive Reuters consent to incur
indebtedness above this amount in the future if we need to do so for any reason.
We Depend on Third Party Suppliers for Key Services
We rely on a number of third parties to supply elements of our trading,
clearing and other systems, as well as computers and other equipment, and
related support and maintenance. We cannot assure you that any of these
providers will be able to continue to provide these services in an efficient,
cost-effective manner or that they will be able to adequately expand their
services to meet our needs. If we are unable to make alternative arrangements
for the supply of critical services in the event of an interruption in or the
cessation of service by an existing service provider, our business, financial
condition and operating results could be materially adversely affected.
In particular, we depend largely on the services of Radianz for the
telecommunications network that connects us with our customers. Radianz, a joint
venture between Reuters and Equant Finance B.V. that is 51% owned by Reuters,
provides these services to us pursuant to an agreement it has entered into with
Reuters. We are not a party to this agreement. Therefore, although we have
rights under this agreement, we must rely on Reuters to enforce this agreement
in the event of any breach by Radianz, but Reuters has no legal obligation to do
so. Disruptions in Radianz' network services to us, including as a result of the
termination of the agreement between Reuters and Radianz, or its inability to
continue to support our business, would have a material adverse effect on our
business, financial condition and operating results.
Our Clearing Operations Could Expose Us to Potential Liability
Errors in performing clearing functions, including clerical,
technological and other errors related to the handling of funds and securities
held by us on behalf of customers and broker-dealers, could lead to civil
penalties imposed by applicable regulatory authorities, as well as losses and
liability in related lawsuits brought by customers and others. Any liability
that arises as a result of our clearing operations could have a material adverse
effect on our business, financial condition and operating results.
Securities industry regulators in the United States are currently
reviewing the extent to which clearing firms will be held accountable for the
improper activities of broker-dealers for which they provide clearing services.
In our correspondent clearing activities, our procedures may not be sufficient
to protect us from liability for the acts of broker-dealers or other wholesale
customers that use our correspondent clearing services under current laws and
regulations. Securities industry regulators may also enact more restrictive laws
or regulations or change their interpretations of current laws and regulations.
Employee Misconduct or Errors Could Harm Us and Are Difficult to Detect and
Deter
Employee misconduct could subject us to financial losses or regulatory
sanctions and seriously harm our reputation. It is not always possible to deter
employee misconduct, and the precautions we take to prevent and detect this
activity may not be effective in all cases. Misconduct by our employees could
include hiding unauthorized activities from us, improper or unauthorized
activities on behalf of customers or improper use of confidential information.
Employee errors in recording or executing transactions for customers
can cause us to enter into transactions that customers may disavow and refuse to
settle. These transactions expose us to risk of loss, which can be material,
until we detect the errors in question and unwind or reverse the transactions.
As with any unsettled transaction, adverse movements in the prices of the
securities involved in these transactions before we unwind or reverse them can
increase this risk.
Our Quarterly Results May Fluctuate Significantly
We have experienced, and may continue to experience, significant
seasonality in our business. This seasonal trend may continue for the
foreseeable future and similar trends may affect our business, financial
condition and operating results in the future. As a result of this and the other
factors and risks discussed in this section and under the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections of our annual report on Form 10-K and quarterly reports on Form 10-Q
incorporated by reference in this prospectus, period-to-period comparisons of
revenues and operating results are not necessarily meaningful, and the results
of any quarter are not necessarily indicative of results for any future period.
We May Not Be Able to Protect Our Intellectual Property Rights
We rely primarily on trade secret, copyright, trademark and patent law
to protect our proprietary technology. However, it is possible that third
parties may copy or otherwise obtain and use our proprietary technology without
authorization or otherwise infringe on our rights. We may also face claims of
infringement that could interfere with our ability to use technology that is
material to our business operations.
In addition, in the future, we may have to rely on litigation to
enforce our intellectual property rights, protect our trade secrets, determine
the validity and scope of the proprietary rights of others or defend against
claims of infringement or invalidity. Any such litigation, whether successful or
unsuccessful, could result in substantial costs to us and diversions of our
resources, either of which could negatively affect our business.
Use of the Internet to Access Our Services Could Expose Us to Risks of Failure
of Internet Performance and Adverse Customer Reaction
Our business has traditionally been conducted with our customers
through the use of proprietary networks for the execution of trades and the
communication of information. To achieve better economies of distribution or to
improve the delivery of our services to our customers, we are moving a portion
of our business from our proprietary networks to non-proprietary networks and
the Internet. This may subject us to additional costs. In addition, existing and
prospective customers may react unfavorably to these changes due to their
concerns regarding the security, reliability, cost, ease of use, accessibility
and quality of service of the Internet or other systems.
The Services We Provide to Professional Non-Institutional Traders May Increase
Our Exposure to Private Securities Litigation
Many aspects of the securities brokerage business, including on-line
trading services, involve substantial risks of liability. In recent years, there
has been an increasing incidence of litigation involving the securities
brokerage industry, including class action suits that generally seek substantial
damages, including in some cases punitive damages. The services we provide to
professional non-institutional traders through our ProTrader subsidiary may
subject us to a greater risk of customer complaints, litigation and potential
liability, including with respect to suitability and delays or errors in
execution or settlement. Any litigation brought in the future could have a
material adverse effect on our business, financial condition and operating
results.
Risks Relating to Our Relationship with Reuters
Reuters Has Significant Control Over Us and May Not Always Exercise Its Control
in a Way that Benefits Our Public Stockholders
Reuters beneficially owns approximately 62% of our common stock. Under
our amended and restated certificate of incorporation, for as long as it
continues to beneficially own more than 50% of our common stock, Reuters will
control many matters that require a stockholder vote. These matters include the
election of directors and the removal of directors without cause, mergers,
acquisitions and other business combinations. In addition, Reuters exercises a
significant amount of influence over corporate matters, such as payment of
dividends and stock issuances, and over our management, business activities and
operations. Currently, five of our directors are also officers, former officers
or directors of Reuters. In addition, if we are deemed to supply news services
at a time when Reuters beneficially owns more than 50% of our common stock, we
will be required to adhere to certain principles relating to integrity,
independence, reliability and freedom from bias which apply to Reuters
generally. If applicable, these principles may influence how we conduct our
business. In addition, to the extent that these principles apply, they may
affect Reuters ability to enter into a transaction that would effect a change of
control of our company.
Our amended and restated certificate of incorporation and our amended
and restated corporate agreement with Reuters also include provisions that
provide Reuters with rights, including when it beneficially owns less than a
majority of our voting stock, that may be less favorable to you and us than the
corporate law governing these matters would be in the absence of these
provisions. These provisions include the right, when Reuters beneficially owns
between 35% and 50% of our voting stock, to block some issuances of equity
securities and some dispositions and acquisitions of assets or businesses
exceeding specified thresholds.
We have agreed not to take any action voluntarily that would reduce
Reuters ownership of our then-outstanding voting stock to less than 51% of our
capital stock or then-outstanding voting stock without Reuters consent. In
addition, we have agreed with Reuters not to take any action that would violate
a stock exchange rule or similar requirement applicable to Reuters, or that
would result in adverse tax consequences for Reuters as a result of its
relationship with us. Reuters substantial ownership position could also limit
our ability to enter into a transaction that involves a change of control, which
might adversely affect the market price of our common stock.
Certain Other of Our Stockholders Have Significant Contractual Rights and May
Exercise Those Rights in a Manner That May Not Benefit Our Public Stockholders
Some former Island stockholders associated with TA Associates, Bain
Capital and Silver Lake Partners will have the right to nominate a total of
three members to our board of directors as long as they each own 8,000,000
shares of our common stock that they received as consideration in our merger
with Island. If the size of our board of directors is increased beyond its
current size, then in most instances these stockholders would have the right to
appoint additional directors. The right of these stockholders to nominate
directors is based on the number of shares of our common stock issued to them as
a result of the merger that they continue to own in the future and not the
percentage of our outstanding common stock represented by those shares. If we
issue a significant number of additional shares in the future, then these Island
stockholders may retain the right to nominate directors to our board in a manner
disproportionate to their overall ownership of our outstanding common stock.
Reuters and Certain Other Stockholders May Have Interests that Conflict with the
Interests of Our Other Stockholders and Us and May Cause Us to Forego
Opportunities
Various conflicts of interest between Reuters or some former Island
stockholders and us may arise in the future in a number of areas relating to our
business and relationships, including the following:
o potential competitive business activities;
o potential acquisitions of businesses or properties;
o incurrence of indebtedness;
o tax matters;
o financial commitments;
o marketing functions;
o indemnity arrangements;
o service arrangements; and
o the exercise by Reuters or those stockholders of control over our
management and affairs.
Individuals who are officers or directors of us and either Reuters, one
of its other subsidiaries or one of the former stockholders of Island may have
fiduciary duties to both companies. Our amended and restated certificate of
incorporation includes provisions confirming the right of Reuters and some of
the former Island stockholders -those with the right to nominate directors to
our board--to engage in activities that compete with us and relating to the
allocation of business opportunities between Reuters or the Island stockholders
and us. The resulting situation may be more advantageous to Reuters or the
Island stockholders than the corporate law governing those opportunities would
be in the absence of those provisions.
Reuters and the Island stockholders are not prohibited from engaging in
our lines of business, including brokerage and research, and may directly or
indirectly compete with us in the future. Bridge Trading, a Reuters subsidiary,
is a broker-dealer that competes with us, primarily in the area of NYSE-listed
stocks and in the soft-dollar business.
Some of Our Agreements with Reuters May Not Be the Result of Arms-Length
Negotiations Between Independent Parties
We have entered into a number of commercial agreements with Reuters.
Some of these agreements were negotiated in the context of a parent-subsidiary
relationship and therefore are not the result of arms-length negotiations
between independent parties. Accordingly, we cannot assure you that the terms of
those agreements, including pricing and other material terms, are as
advantageous to us as the terms we could have negotiated with unaffiliated third
parties.
Risks Associated with Purchasing Our Common Stock in this Offering
Certain Provisions of Our Certificate of Incorporation, Bylaws and Delaware
Corporate Law Could Make a Take-Over More Difficult, Could Adversely Affect the
Market Price of Our Common Stock or Deprive You of a Premium over Our Market
Price
Our amended and restated certificate of incorporation and amended and
restated bylaws and the laws of Delaware (the state in which we are organized)
contain provisions that might make it more difficult for someone to acquire
control of us in a transaction not approved by our board of directors. These
provisions could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors other than the candidates
nominated by our board. For example, our certificate of incorporation authorizes
our board of directors to determine the rights, preferences, privileges and
restrictions of unissued series of preferred stock, without any vote or action
by our stockholders.
Thus, the board can authorize and issue shares of preferred stock with
voting or conversion rights that could adversely affect the voting or other
rights of holders of our common stock. In addition, the issuance of preferred
stock may have the effect of delaying, deferring, or preventing a change of
control of our company, because the terms of the preferred stock that might be
issued could potentially prohibit our consummation of any merger,
reorganization, sale of substantially all of our assets, liquidation or other
extraordinary corporate transaction without the approval of our stockholders.
The existence of these provisions could adversely affect the market
price of our common stock. Although these provisions do not have a substantial
practical significance to investors while Reuters controls us, these provisions
could have the effect of depriving stockholders of an opportunity to sell their
shares at a premium over prevailing market prices should Reuters voting power
decrease to less than 50%.
Future Sales of Our Shares Could Adversely Affect the Market Price of Our Common
Stock
As of September 30, 2002, there were 329,237,231 shares of our common
stock outstanding. Of this amount, 206,900,000 shares are owned beneficially by
our parent, Reuters. Reuters will be able to sell its shares in the public
markets from time to time, subject to certain limitations on the timing, amount,
and method of such sales imposed by SEC regulations. We have also granted
Reuters (and its transferees) rights to demand registration of their shares and
to include their shares in future registration statements. If Reuters were to
sell a large number of its shares, the market price of our stock could decline
significantly. In addition, the perception in the public markets that sales by
Reuters might occur could also adversely affect the market price of our common
stock.
In connection with our acquisition of ProTrader Group, L.P. in October
of 2001, we issued 5,017,058 common shares to former ProTrader stockholders. All
of these shares may now be sold without restriction.
On September 23, 2002, we filed a registration statement on Form S-8
under the Securities Act with respect to up to 1,553,151 shares of our common
stock that are reserved for issuance pursuant to our stock option plan. As a
result, shares received by employees upon exercise of their options will be
eligible for resale by the holders in the public markets, subject to certain
lock-up agreements and Rule 144 limitations applicable to affiliates. We may
increase the size of its option plan and include additional shares in the Form
S-8 under the Securities Act. We may file a registration statement permitting
resale of these shares by affiliates.
In connection with our acquisition of Island, we issued 80,658,829
common shares to former Island stockholders along with warrants and options to
purchase an additional 5,793,455 of our common shares. Many of these shares may
now be sold without restriction. In addition, we have agreed to provide some
Island securityholders with registration rights that would facilitate their
future sale of our common shares received as a result of the acquisition of
Island.
Sales of substantial amounts of our common shares in the public market
could adversely affect the market price of those shares. A decline in the market
price of Instinet's common shares could adversely affect its access to the
equity capital markets. In addition, any issuance of shares by us could dilute
our earnings per share.