LONDON Japan-based Nomura (8604.T), a trading powerhouse in Europe, is combining its two equity platforms, sources familiar with the matter said, putting an end two years in which it allowed them to compete against each other.
The Japanese bank will detail heavy cost cuts to its overseas operations on Thursday and streamlining its business in Europe, where it owns Instinet and Nomura International, is set to be high on the agenda.
"Instinet and Nomura were separate for years but Nomura now wants to rationalize cost," one of the sources said.
Instinet, Nomura International and rivals such as Deutsche Bank (DBKGn.DE), Morgan Stanley (MS.N) and UBS UBSN.VX, make money by finding the best share deals available on behalf of their pension and hedge fund clients.
Such brokers have struggled to stay profitable in recent years as trading dried up, with uncertainty linked to the euro zone debt crisis spooking investors.
Nomura's new Chief Executive Koji Nagai has announced another $1 billion of cuts by early 2014 as he rows back on the ill-fated acquisition of the European and Asian operations of failed Wall Street bank Lehman Brothers in 2008.
The plan comes on top of a $1.2 billion pruning announced earlier and involves heavy cuts in Europe, sources have told Reuters.
Nomura is the only major brokerage to own two separate trading platforms, something many have long said was an anomaly.
Still, customers valued Instinet's independence. As a so-called agency broker, it is a clients-only platform on which Nomura does not run trades on its own behalf, so clients can be certain they are not competing against the bank.
Nomura bought Instinet for $1.2 billion from private equity firm Silver Lake in 2006, and went on to acquire Lehman Brothers' trading business in November 2008.
Rivals have speculated Instinet would be sold on ever since, but it never happened and looks more unlikely now given Nomura would struggle to match the $1.2 billion price tag.
Nomura has been discussing merging the businesses for years, but little progress was ever made, the sources said.
Instinet employs 180 people in Europe, while some 4,000 staff are employed by Nomura International in the region.
Instinet is seen as a smaller, more nimble firm focused on electronic trading while Nomura International is a far larger, full service, investment banking-type broker, which regularly ranks as the top trader on the London Stock Exchange (LSE.L).
RISK OF SPOOKING CLIENTS
Combining Instinet and Nomura International will not be simple.
The two businesses cater to different client groups -Instinet is popular among pension fund managers, which value anonymity when trading, while Nomura is stronger with high-frequency hedge funds that require speed.
This means the trading platforms the two firms supply to their respective customers are very different and merging the companies, and their systems, could risk alienating one or both client groups.
Nomura also needs to be sensitive to subtle cultural differences between the firms that are important to clients who like the fact that Instinet is run separately from Nomura.
Instinet, like rivals ITG and Liquidnet, is an agency broker and therefore liked by asset managers and hedge funds because they know such firms only handle client orders so are seen as less conflicted than investment banks, which trade for their own profit.
Moving Instinet into Nomura would jeopardize the perception that Instinet is independent and risk spooking clients who could easily take their business elsewhere.
"Instinet's appeal is that it's not part of a bank so if they merge the businesses the clients could walk overnight," said a source with knowledge of Nomura's plans.
"Nomura is thinking it should become a client of Instinet like the other banks as this should allay Instinet client concerns."
Work looks set to accelerate following the appointment in June of Adam Toms, a former managing director at Nomura International, as the new chief executive of Instinet Europe.
"With its agency model, advanced electronic platform and well-deserved reputation for trading excellence, Instinet provides a unique value proposition to the buy side," said Toms at the time of his appointment.
The challenge for Toms over the coming months is ensuring Instinet keeps that proposition, as it works through what looks to be a complex merger with his former emplo9yer.
(Editing by Douwe Miedema and Anthony Barker)