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Why Instinet looks set to survive

Speculation about Instinet Group's future has heated up again recently. Equities trading has not been an easy business to make money in during the past three years as investors looked for ways to cut their costs. Independent specialist brokers such as Instinet found it particularly tough.

But 2004 was a decent year for the firm. A reorganization, which involved the creation of two separate divisions, appears to have come off smoothly. One division, Instinet, is the institutional broker; the other, INET, is the alternative electronic trading system, which combines Instinet's old ECN with Island ECN, which the firm bought in 2002.

The reorganization has enabled each of the two businesses to concentrate more fully on its own clients and business development, and has come at a time when the equities trading business has picked up across the Street. As a result the company has managed to cut costs and to improve profits this year.

Reuters prepares to sell

But there are two things hanging over the group's head causing the speculation. First, conventional wisdom has it that independent brokers cannot, or should not, survive for long. Costs are supposed to be too high and profit margins are getting smaller.

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