Is Instinet Group the Next Deal?

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Every day there seems to be a new deal, from the relatively small -- such as MarketWatch (Nasdaq: MKTW) -- to the large, such as Kmart (Nasdaq: KMRT) and Sears (NYSE: S). There are also potential deals, such as for DoubleClick (Nasdaq: DCLK).

Well, add another to the potential list: Instinet Group (Nasdaq: INGP). This tidbit of news came from yesterday's New York Times. According to the report, Instinet has hired UBS to auction the company to the highest bidder.

Founded more than 30 years ago, Instinet is a pioneer in electronic trading. The company allows its 1,500 institutional customers to trade securities directly or anonymously with each other across 40 global markets.

No doubt, Instinet's announcement was great news for shareholders, who have not seen much from Instinet. The stock increased 7% to $6.16. Unfortunately, while MarketWatch fetched a nice premium, the same is probably not the case for Instinet.

After all, there is only a handful of possible bidders. Top contenders include Archipelago (PCX: AX) and Knight Trading Group (Nasdaq: NITE), as well as the New York Stock Exchange and Nasdaq.

Unfortunately, the institutional trading business is ruthlessly efficient -- subsisting on thin margins. Thus, the sector is ripe for consolidation, and it will probably be quick.

So does consolidation mean the end of cheap trades? Probably not. Interestingly enough, Reuters plans to launch its own electronic trading platform. And, by the way, the company owns 61.9% of Instinet, which means Reuters stands to make more than a billion dollars from its sale.

Fool contributor Tom Taulli does not own shares in the companies mentioned in this article.