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A new technology that allows large blocks of stock to trade more
efficiently got the green light from the SEC.
http://www.wired.com/news/news/business/story/7161.html
JW
abprosys@xxxxxxx
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Trading Floors Try On New Technology
by Daniel S. Levine
3:15pm 25.Sep.97.PDT A new technology that aims to make trading completely anonymous and
let large blocks of stock trade without bruising the market got a green light from the
Securities and Exchange Commission last week. By next spring, it will be up and running
at the Pacific Stock Exchange, which hopes the system will beef up its business while
bridging the trading gap between individual and institutional investors.
"It's a significant step forward in our efforts to utilize technology to improve the
stock transaction process - a step that will have significant benefits for all market
participants," said Robert Greber, chairman of the Pacific Exchange.
Like other computer-based market access networks, OptiMark Trading System allows users to
post the number of shares they want to buy or sell and the price at which they want to do
it. But because large blocks of stock are often difficult to execute at a single price,
the system allows the entry of a third dimension of "satisfaction" or "willingness to
trade" at various prices.
A user anonymously enters the information into the system saying his preference will be
to pay US$100 each for 1 million shares of XYZ, but that he will be satisfied if he buys
half at $100 and the other half at $101.
The system operates as a "call" market. Every 90 seconds, it calls for all the orders in
the system and automatically pairs off all the buy and sell orders that match. No one
using the system has any idea what other people using the system are looking to do.
"What we have done is answer most of the inequities built into the current market
structure," said George Wallace, vice president of Durango, Colorado-based OptiMark.
Institutional and retail traders basically exist in separate worlds, and their trades
don't often interact. The large blocks handled by institutions are often traded off the
market, in deals set up by brokers. But the OptiMark system - which allows anonymity not
only about who has ordered a buy or sell, but of the size of the order - could minimize
the need for such special arrangements by allowing the big blocks to trade anonymously on
the regular market.
The current market structure lives on information. If a large institution wants to place
an order of 2 million shares of IBM, it currently has no way of going into the market
without being damaged by market moves caused by the sheer knowledge of a large buyer in
the market.
Studies have placed the cost of market impact for large orders at around 10 times the
commission costs, Wallace said, providing the main selling point for OptiMark technology.
"We feel it will bring an entire new means of trading into the securities markets," he
added.
For the Pacific Exchange, OptiMark offers a way to capture transactions it might not
otherwise see. Though institutions account for more than 60 percent of the stock market's
volume, they are responsible for less than 5 percent of the volume on the Pacific
Exchange.
However, OptiMark poses less of a threat to the other exchanges than it does to Instinet,
the trading system of Reuters Holdings Plc. OptiMark will initially trade exchange-listed
securities, while Instinet trades Nasdaq-listed issues. Eventually, though, OptiMark
expects to expand into Nasdaq issues as well as options on the Pacific Exchange and the
Chicago Board Options Exchange.
Terry Mulry, a spokesman for Instinet, said he was aware of OptiMark, but gave no
indication that his company planned to do anything different in response to it. "Instinet
focuses on its customers needs," he said. "We believe that focusing on our customer needs
is the best way to take care of any competition."
OptiMark founder and CEO William Lupien had served as president of Instinet between 1982
and 1988. During that time, volume on the system grew to 1.4 billion from 120 million and
revenue hit $35 million, up from just $2 million. Lupien left a year after Reuters
acquired the company in a hostile takeover.
Though the OptiMark system is designed for use by institutional traders, retail customers
will be able to take advantage of orders placed in OptiMark through the exchange, which
will automatically feed limit orders on its books when it implements the system in the
spring. The exchange said this will allow a new level of interplay between big and small
investors.
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