Alternative stock system loses investors

Waterhouse Investor Services Inc., the No. 3 U.S. Internet securities brokerage firm, is likely to become the second investor to back away from Island, a fast-growing alternative stock trading system.

Waterhouse Investor Services Inc., the No. 3 U.S. Internet securities brokerage firm, is likely to become the second investor to back away from Island, a fast-growing alternative stock trading system.

"It's unlikely to close at this point," said Michael Dunn, a spokesman for Datek Online Holdings Inc., Island's majority owner.

Talks unraveled because Waterhouse was reluctant to pay the $25-million price it had agreed to in May for a 12.5-percent stake in Island, a person familiar with the deal said.

"It's a wild land grab out there," said the source, referring to the frenetic pace at which investors were snapping up stakes in alternative trading systems, also called electronic communications networks, or ECNs. Island ranks as the country's second-largest ECN.

But Melissa Gitter, a spokeswoman for Waterhouse, a unit of Canada's Toronto-Dominion Bank, declined to discuss the issue.

Popular alternative
ECNs, computer systems which match buy and sell orders for stocks, are growing in popularity because they offer a cheaper, quicker alternative to trading on traditional stock exchanges.

The deal with Waterhouse was falling apart due to a disagreement over the valuation of Island, Dunn confirmed, though he decline to provide more detail.

Waterhouse's planned investment in Island was announced in May, at the same time Vulcan Ventures, a firm owned by Microsoft Corp. (Nasdaq:MSFT) co-founder Paul Allen, said it would invest in Island.

Vulcan already bailed
But without explanation Vulcan scrapped its plan to invest $25 million for a 12.5-percent stake in Island in July. Vulcan's proposed investment in Island implied Island's total value was around $200 million.

Vulcan pulled out of the deal a day after the U.S. Attorney's Office subpoenaed Datek Online for documents in connection with its investigation into Datek's predecessor company, Datek Securities Corp.

Island president Matt Andresen confirmed problem with Waterhouse's investment in Island was a disagreement about the value of Island, but he gave no further details.

Andresen said he was unconcerned about the impact of the news on his company's image, even though a high-profile firm such as Vulcan had also defected.

"I think we are in an enviable position these days," said Andresen, referring to Island's high trading volume and impressive growth.

CEO left
News of the deal souring comes one day after the exodus of 29-year-old Datek Online Chairman and Chief Executive Jeffrey Citron.

Andresen said Island would still do business with Waterhouse, whose large flow of stock orders represents a boon to any ECN.

Citron and Datek are under investigation by authorities in connection with Robert Brennan, the small capitalization stock promoter who has been barred from trading securities.

"Certainly, there were a lot of reputation and legacy issues with our majority owner," said Andresen, when asked why Citron departed. "But we are a separate company, and we are separately regulated."

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