If Optimark sneezes, ASTN dies of pumanomia[sic]:"OptiMark System Gets Reality Check As Challenges, Restrictions continue
By GREG IP
Staff Reporter of THE WALL STREET JOURNAL
In the race to replace traditional stock markets with electronic trading
systems, OptiMark had all the ingredients to be among the early leaders.
It entered the competition with an innovative concept, a founder with a
sparkling track record and heavy-hitting backers like Goldman Sachs
Group Inc. and Merrill Lynch & Co.
But the contrast between its initial promise and its disappointing early
results is a reality check for the numerous electronic-trading networks, like
OptiMark and the more-conventional systems known as ECNs, that are
vying to take business from the New York Stock Exchange and Nasdaq
Stock Market.
Indeed, since OptiMark's launch in January on
the Pacific Exchange, its trading volume has
fallen well short of expectations and remains
dwarfed by rival electronic systems with
supposedly lesser technology.
OptiMark has struggled because many
traders have found it hard to use, which in turn
has added to the difficulty of achieving critical mass by attracting enough
volume so that a buyer will find a seller with a matching order. Moreover,
its access to the Big Board was hampered by restrictions imposed by the
exchange, an obstacle that is restricting most other electronic systems as
well.
Its backers believe OptiMark's struggles are behind it. Philip Riese, chief
executive of OptiMark Technologies Inc., the system's developer in
Jersey City, N.J., says it has been made easier to use. "We are seeing the
results now," he adds. "It is going to be, like all new systems, a gradual
buildup. Each day people are in the system, they are seeing better results,
and as we get more liquidity, they're going to get better results yet."
In addition, it expects to benefit from trading Nasdaq stocks for the first
time. This week, Nasdaq put OptiMark into operation with 10 stocks,
soon to expand to 250. Previously, OptiMark could only trade 1,400 Big
Board-listed stocks through the Pacific Exchange.
Still, the early disappointment has been a comeuppance for those who saw
OptiMark as the first electronic nail in the Big Board's coffin. "If the New
York Stock Exchange isn't afraid, they should be," Junius W. Peake, a
finance professor at the University of Northern Colorado, was quoted as
saying in Securities Industry News, an industry publication, in July last
year.
Riding such enthusiasm, closely held OptiMark Technologies and its
founders thought last February it could go public with a valuation of more
than $4 billion, more than the $3.5 billion value of all the membership seats
on the Big Board, according to one investment analyst briefed on those
discussions. Dow Jones & Co., publisher of The Wall Street Journal and
the Interactive Journal, owns 6% of OptiMark Technologies.)
Prof. Peake, a fan of electronic markets, liked OptiMark so much he
bought a small private stake. He says now, though he has no regrets, some
lessons have been learned: "You have to ... design to meet the needs of
customers a little better, and you have to be patient. You need critical
mass. OptiMark is beginning to head in that direction, but who knows
whether it will make it or not?"
OptiMark was co-founded three years ago by William Lupien. In the
1980s, Mr. Lupien turned then-infrequently used Instinet Corp. into the
most successful "electronic communications network," or ECN. He left
after Instinet was taken over by Reuters Group PLC. An ECN displays
and executes relatively simple orders to buy or sell a set amount of stock
within prescribed price limits.
Mr. Lupien devised OptiMark to handle more complex orders than an
ECN and do so invisibly to overcome institutions' fear of showing the full
size of their orders to the market. For example, an investor can specify a
desire to buy 100,000 shares of Coca-Cola at $50, but 500,000 at $48.
OptiMark's computer combines all such orders and matches them every
two minutes.
Good in theory, problematic in practice. Kevin Cronin, head of listed stock
trading at AIM Management Group, a mutual-fund manager in Houston
with about $80 billion in equity assets, said his traders were all trained on
OptiMark. But it took two to 10 minutes to fill out an order, and
OptiMark almost never found a match. "Many people have been put off
by the level of detail you had to know to get an order into the system, and
never got positive reinforcement from it: They found no liquidity" -- that is,
someone with whom to trade.
From a peak of 1.45 million shares a day after its start last February,
OptiMark's volume slumped to less than 200,000 shares a day in June. It
has since recovered to a little over one million in September, but that's well
below the eight to 10 million that one backer says the company expected.
And less than a third of its volume actually exploits OptiMark's special
features. Instinet, in contrast, trades more than 150 million (mostly
Nasdaq) shares a day.
One problem is that OptiMark's anonymity sometimes limits its usefulness,
Mr. Cronin says, noting human interaction helps a trader understand the
market. A trader wants to know how many buyers or sellers he traded
with, and to hear from brokers representing a seller of a stock he may
want to buy. "OptiMark never allowed us to understand supply and
demand."
Furthermore, only 29% of OptiMark's volume comes from internally
matching orders. The rest resulted simply from sending the orders to the
Big Board or another exchange via the Intermarket Trading System, an
electronic link between the nation's exchanges. "You put in an order to buy
Ford, and you got an execution, not from another OptiMark participant,
but [from] a New York offering or Pacific offering," says Andrew Brooks,
head of stock trading at mutual-fund manager T. Rowe Price Associates.
The Big Board and other exchanges let OptiMark use the ITS if at least
70% of OptiMark's volume was internally matched. When it failed to meet
that level, OptiMark quit the ITS during the summer, hurting volume. Mr.
Riese says OptiMark has since switched to the Big Board's own
SuperDot system to access that market.
Mr. Riese says OptiMark didn't pursue an IPO because it was told that
after the Nasdaq launch, "we would have a significantly stronger story to
tell." He declined to comment on valuation or on OptiMark's financial
results.
In July, OptiMark did raise $100 million in a private placement, 90% of it
from a venture-capital fund led by Japan's SoftBank Corp.
Mr. Lupien said in an interview in July OptiMark should catch on more
quickly with Nasdaq than with Big Board stocks. Nasdaq, unlike the Big
Board, is embracing the system. (Indeed, Nasdaq-owned by the National
Association of Securities Dealers-holds warrants convertible into an
ownership stake.) Second, Nasdaq has no central market like the Big
Board as a competing destination for block trades. Third, Mr. Lupien
thinks OptiMark's anonymity will be more valuable in Nasdaq's multidealer
market where it's hard to discreetly trade big blocks of stock." |
