Operating and financial review continuedProduct developmentProducts in the information technologyindustry are becoming increasinglysophisticated with an associated increase independence on third party software. Inaddition, Reuters faces challenges indeveloping internet-based applications andsoftware. As a result, Reuters, like otherinformation vendors, may encounterdifficulties or delays in the development,production, testing, marketing, installationand market acceptance of new products.Broker activitiesCertain Reuters subsidiaries act as brokers inthe financial markets but do not undertaketrading on their own account. InstinetCorporation is an agency broker in theequities markets and Reuters TransactionServices Limited (RTSL) operates theDealing 2000–2 and 3000 electronicbrokerage services for the foreign exchangemarket. These brokers could incur lossesfrom broken trades and, in respect of equities,the failure of a counterparty. Reuters seeks tomitigate these risks by computerised systems,procedural controls and contractualagreements with customers.SEC rules for alternative tradingsystemsIn December 1998 the US Securities andExchange Commission (SEC) promulgatednew rules relating to the regulation of certain“alternative trading systems” (ATS). Therules expand the SEC’s interpretation of thedefinition of “exchange” under the USsecurities laws to encompass certainelectronic brokerage activities, includingthose conducted by Instinet Corporation.The requirements of Regulation ATSapplicable to Instinet Corporation include,among others, mandatory public display of,and public access to, best-priced ordersdisplayed within the system and theestablishment and application of fair accessand capacity, integrity and security standards.The new rules became effective on 21 April<strong>1999</strong>, subject to a phase-in of the publicdisplay and access requirements. The phaseinschedule generally provides that analternative trading system must havecomplied with the public display and accessrequirements with respect to a total of 50% ofNASDAQ securities by 28 September <strong>1999</strong>and must comply with these requirementswith respect to a total of 75% of NASDAQsecurities by 25 April 2000; and with respectto a total of 100% of NASDAQ securities by20 June 2000.Instinet has modified and enhanced itstrading systems to comply with RegulationATS and its implementation dates. Instinetcontinues to review and monitor its tradingsystem and procedures for compliance withRegulation ATS.SEC rules on ECN usageReuters and Instinet Corporation continue tomonitor the operation of the SEC rulesgoverning market-maker and exchangespecialist usage of electroniccommunications networks (ECNs).Most recently, by letter dated 19 November<strong>1999</strong>, the SEC Division of Market Regulationissued an extension, until 3 March 2000, ofthe Division’s no-action position verifyingInstinet Corporation’s status as an ECN. TheDivision continues to condition its positionupon, among other things, InstinetCorporation’s representation that it hassufficient capacity to handle the volume oftrading reasonably anticipated. Reuters hasno reason at this time to believe that InstinetCorporation will not be able to continue tomeet its obligations as an ECN undercurrently applicable SEC rules, although noassurance can be given that the Division willcontinue to grant such letters or that theapplicable rules or the enforcement of thoserules will not change.NASD initiativesThe US National Association of SecuritiesDealers, Inc. (“NASD”), which oversees theactivities of US broker-dealers and alsooperates and regulates the primary market forthe trading of over-the-counter securities(NASDAQ), is considering a number ofchanges to the NASDAQ marketplace.Some of these changes could put the NASDinto direct competition with Instinet orotherwise have a significant impact onInstinet’s business. Each of the NASD’sproposals must be approved by the SEC. Atthis time Reuters is unable to predict whether,when or in what form any of the NASD’sproposals will be approved or implemented,or the impact that any such implementationwould have on Instinet Corporation’sbusiness.Instinet is in discussions with SEC andNASD staff regarding important issues suchas ECN access fees, data dissemination, ECNaccess to ITS, SelectNet service and capacityand, most importantly, the overall structure ofUS equities markets. Reuters is unable topredict the outcome of these discussions andthe evolution of the US equities marketstructure, although these issues and themarket structure in general may have asignificant impact on Instinet’s equitiesbusiness.Further regulation of transactionproductsThe increasing use of electronic systems asalternatives to traditional exchange and overthe-countertrading has led authorities inseveral jurisdictions to explore variousmethods of regulating such systems,including the SEC rules described above,implementation of which could impactInstinet and other transaction productsoffered by Reuters from time to time.Networks and systemsReuters networks and systems risk beingimpacted by a catastrophic failure of long orshort duration due to factors beyond itscontrol. Reuters seeks to minimise these risksas far as commercially reasonable by, interalia, security controls, systems andcommunications redundancy and eliminationof single points of failure where feasible.InternetThe availability of the public Internet andinternet technology is reducing barriers toentry for new information providers, creatingadditional competition and new price/costdynamics in the industry. It may also increasethe availability of commoditised data incheaper forms and the loss of control overintellectual property. As a new publishingmedium, it will also create new outlets forcontent providers.Reuters strategy is based on developinginternet-based products and reducing costs42 Reuters Group <strong>PLC</strong> Annual Report <strong>1999</strong>
through internet-based infrastructure. Inpursuing this strategy, Reuters faces risksassociated with delays or difficulties indeveloping and using new technology andsoftware for the Internet. Reuters also facesrisks associated with implementing its newbusiness model in the competitive and rapidlychanging Internet environment. There can beno assurance that Reuters will be able tosuccessfully implement its strategy for theInternet or adapt its business to internetcommerce.Because of the increasing importance of theInternet to Reuters business, the value ofReuters shares may be more adverselyaffected by a decline in the value of internetstocks generally than would have been thecase in the past.Geographical operationsReuters may suffer discriminatory tariffs orother forms of government intervention dueto the nature of its editorial and otherreporting activities.Exposure to companies not controlledby ReutersReuters has entered into joint ventures withand made strategic investments in a numberof companies involved in related businesswhere Reuters does not exercise managementcontrol, including investments made throughthe Greenhouse Fund in internet-relatedcompanies. The value of Reuters interest in anumber of these companies has increasedsignificantly, in part as a result of increasedinvestor interest in companies involved in theinternet and technology sectors. The value ofReuters interests may fall if, among otherthings, the performance of these companiesor companies in these sectors generally donot meet investors’ expectations or because ofadverse economic conditions. AlthoughReuters generally seeks board representationor other means of participating in themanagement of companies or joint venturesin which it invests, Reuters ability to affectthe performance of these companies or jointventures may be limited where it does notexercise management control.Reuters Group <strong>PLC</strong> Annual Report <strong>1999</strong> 43
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