Securities and Exchange Commission Historical Society

Transformation & Regulation: Equities Market Structure, 1934 to 2018

Automating the Exchanges, 1976 - 1995


By the time the NASDAQ went into operation, one of the factors that had led to the reevaluation of market structure in the 1960s and 1970s—the rise of institutional investors—had already spurred the creation of the most comprehensive of the early automated markets, Instinet. In contrast to NASDAQ, there was no trial run as just a communications system—from its founding in 1969, The Institutional Networks Corporation system allowed for the trading of shares by banks, insurance companies, and mutual funds. There were no exorbitant commissions, no “give-ups,” no brokers at all, and institutions could trade in complete anonymity at all hours of the day.

But the system dubbed “Instinet” was slow in taking off—in the 1970s people still wanted to talk to a broker. Instinet also needed to connect with the wider market. The first big accomplishment was getting Instinet linked with the regional exchanges. Owner Jerry Pustilnik joined the Pacific Exchange, which enabled Instinet to handle order flow from the third market. In the early 1980s, Bill Lupien, a firm believer in the possibilities of Instinet, began working with Pustilnik to raise the funds required to expand the system. That was why he arranged his demonstration with Robert Fomon and obtained E.F. Hutton’s backing for expansion of the system. By 1983 Lupien was running Instinet. His innovations included linking it with NASDAQ and the London Stock exchange. By 1987, Instinet even had a link to the NYSE floor, but it was manual—orders had to be printed out and carried to a specialist.

The advantages of this electronic execution system were on brilliant display during the October 1987 market break. As NASDAQ market makers and exchange specialists failed to provide liquidity, Instinet continued to function—providing an object lesson for innovative traders and exchanges alike. By 1990, Instinet was doing about 13 percent of the NYSE’s volume.

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