New Order Matching System to Dramatically Improve Market Efficiency, Enable Price Discovery, Lower Market Impact Costs and Optimize Investor Satisfaction
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NEW YORK, Sept. 24 -- Institutional money managers frequently complain about the high market impact costs associated with obtaining liquidity. Billions of dollars are lost each year by these institutions, and the investors they represent, as a result of market structure inefficiencies that reduce liquidity and increase price volatility. As a result, portfolio managers and traders withhold their full trading desires from the market, for fear of provoking unfavorable price moves.
That's about to change.
A new Durango, Colorado company, OptiMark Technologies, Inc. (OTI), believes that its revolutionary three-dimensional transaction system will attract currently hidden liquidity to the markets and significantly reduce the market impact costs that are the bane of money managers. As an added benefit, the system will allow all market participants, regardless of size, to meet on a level playing field. OTI will unveil the OptiMark? system here tomorrow at Pace University's Third Annual Securities Industry Conference.
OptiMark Technologies is headed by William A. Lupien, chairman and CEO, who was formerly chairman of Instinet Corporation. OptiMark's product development is being funded by a group that includes Dow Jones & Co. IBM is taking the lead role in system development and operational support. The State Street Information Partnerships (SSIP) division of State Street Bank & Trust has signed on as a strategic partner for marketing, distribution and vertical integration. The Pacific Stock Exchange and the Chicago Board Options Exchange have committed to be the first exchanges to make the OptiMark? System available to investors.
The OptiMark? System goes beyond defining a bid or offer in terms of the usual two dimensions of price and size to provide traders with a standardized methodology for expressing their levels of satisfaction (i.e., willingness to trade) across a continuous range of outcomes. By optimizing satisfaction (the "third dimension"), while assuring anonymity, non-disclosure and price discovery, the OptiMark? System provides a secure medium for market participants to release previously-withheld liquidity to the market.
The OptiMark? System is designed to maximize the satisfaction of both parties to a financial transaction. It will readily enable buyers and sellers to specify a variety of trading preferences and, based on those preferences, to find the best trade prices and sizes to complete transactions. Participants can retain their anonymity and keep their trading strategies secret.
The system accommodates the fact that there usually isn't just one price at which a trader is willing to buy or sell. Typically, there is a range of acceptable prices, depending on such factors as the size of the block, timing and market momentum. Existing trading systems can represent a single price in a bid or offer, but these are only a crude approximation of buyers' and sellers' real intentions.
The OptiMark? System, on the other hand, by allowing a trader to express ? without disclosure -- his or her range of willingness to trade across multiple prices and sizes, attracts a previously "hidden" market, creating liquidity and maximizing satisfaction on both sides. [Editors: see sample user Profiles.]
"Improved market liquidity, a paramount concern of institutional investors, depends on the investor being able to express a variety of trading desires to the market over any size range without disclosing either intentions or identity," Mr. Lupien said. "The OptiMark? System, by assuring anonymity and non-disclosure, will attract liquidity back to the market at unprecedented levels, to the benefit of all investors, small and large."
The OptiMark? System excels at optimizing the execution of buy or sell orders that are large relative to a security's normal daily volume. (According to Plexus Group, a Santa Monica-based consulting firm, more than two-thirds of original institutional desk orders for a given stock exceed half of that stock's daily volume.) Many of these orders are never presented as a single block to the market today because of the effect that would have on prices. Instead, such orders are filled in pieces, often at unfavorable prices.
"Through OptiMark, buyers and sellers are able to represent their intentions with visually intuitive 'satisfaction Profiles' and can take advantage of the sophisticated search and matching capability of the system's supercomputer to execute entire transactions at optimal prices," said Dr. Terry Rickard, president of OptiMark Technologies.
Developed in consultation with institutional investors and other market participants, the OptiMark? System will be delivered in the current exchange and broker/dealer environment. System features will reflect the needs of institutions, broaden the roles of exchanges and broker/dealers, and enable retail order flow to participate in institutional trading.
The system, which has applications in all financial markets, will be offered in the equity markets initially, and then in related options markets. It can thus enhance multi-legged trading strategies that link stocks and options.
"Having already secured the participation of several leading industry partners, plus two exchanges -- the PSE, a recognized innovator in the equities arena and the world's third-largest options exchange; and the CBOE, the world's first and largest organized exchange for listed options -- helps assure our ability to take today's markets into the 21st century," said Mr. Lupien.
"Historically, the PSE has been a technology innovator, and we view OptiMark as a significant step forward in the application of technology to improve the stock transaction process," said Robert Greber, PSE chairman and CEO. "We look forward to building both our equities and options business via OptiMark."
"As a charter exchange user of the OptiMark? System, the CBOE is positioned to further facilitate the growth of the institutional use of the options market," said CBOE vice chairman William C. Floersch. "Institutions now account for 50 percent of CBOE's public customer business. The CBOE, distinguished by its deep, liquid markets and superior order handling and execution technology, remains committed to offering innovative systems to best serve this growing customer base."
The OptiMark service will be available to additional exchanges that want to access the system. While OptiMark's technology is protected by multiple patents pending, the company's strategy is to offer it non-exclusively as an integrated transaction facility for all exchanges, rather than causing further market fragmentation via a proprietary trading system approach.
"We see significant synergies for our institutional customers from combining OptiMark's innovative order profiling technology with State Street's existing array of investor services," said Andrew W. Howieson, a State Street senior vice president and managing director of its Information Partnerships division. "We also believe that State Street's extensive experience in international securities markets can help accelerate the incorporation of OptiMark's technology into non-U.S. markets and its use for securities other than equities and equity options," he added.
The OptiMark? System, designed to allow maximum participation via an open architecture, will run over multiple distribution networks to both new and existing trader workstations. The OptiMark? System will be distributed through existing vendors' market data services, including Dow Jones Telerate, which serves the financial community in 83 countries. The OptiMark? System will also be available non-exclusively to other network providers that wish to carry the service.
IBM will provide the complete technology infrastructure to support this project, including an RS/6000 SP supercomputer that will power OptiMark, as well as software development, operations support and other integration services. The system also will be accessible over the IBM Global Network, a private and secure voice, data and video network.
"IBM participation in the OptiMark project illustrates our commitment to take a leadership position in capital markets technologies," said R.M. Howe, IBM's general manager - worldwide banking, finance and securities industry. "This end-to-end solution draws on the experience of our successful implementations in exchange systems and trading floor technologies over the past five years," he added.
Dow Jones, through its Dow Jones Telerate unit, is a leading global provider of news and market information, decision-support products, trading room systems and transaction services for financial institutions. Dow Jones also publishes The Wall Street Journal, Barron's, other business periodicals, business and financial newswires, other electronic business information services, business television services and community newspapers.
The Chicago Board Options Exchange (CBOE), the pioneer of listed options and the world's largest options marketplace, accounts for 94 percent of the index options trading and more than 60 percent of total options trading in the U.S. The CBOE set the industry standard in the development of exchange technology, including order routing, handling and execution systems, and its integration with the proven open outcry trading style.
The Pacific Stock Exchange (PSE) is the third most active stock exchange in the U.S., and the third largest stock options exchange in the world. More importantly, the PSE is the historic source of technological innovation for securities trading. The Pacific automated order delivery, execution and reporting before any other exchange; invented net-by-net clearing, which eliminated the physical delivery of cash and stock certificates at the end of each trading day; and pioneered the development of interexchange trading systems. These were revolutionary advances in their time. Today, they're a given for financial markets around the globe.
IBM's Banking Finance and Securities Group works with financial services companies around the world to provide mission-critical hardware, software and consulting services and solutions.
State Street Bank and Trust Company, a wholly owned subsidiary of State Street Boston Corporation (NYSE: SST), and one of the oldest financial institutions in the United States, is a leading provider of financial services worldwide and the largest provider of pension plan and mutual fund services in the United States. Headquartered in Boston, State Street employs more than 12,000 people worldwide, holds more than $2.6 trillion in customers' financial assets in custody and directly manages more than $270 billion in customers' assets. The firm has offices in 16 countries.
State Street Information Partnerships (SSIP), formed in May 1996, focuses on State Street's continuing development of pre-trade information services, broader transaction execution capabilities and integration of post-trade information services.
OptiMark Technologies, Inc. (OTI) is a newly-formed corporation whose mission is to increase the efficiency and reduce the cost of securities trading worldwide through the application of the company's technology.
OTI is the owner and developer of the revolutionary new OptiMark? system technology, an optimal market mechanism with features designed to satisfy the trading desires of all market participants, from small retail to large institutional investors. The OptiMark? System allows investors to represent their trading preferences across a full spectrum of prices and sizes, and performs an optimal search for liquidity among all market participants. The OptiMark? System is being offered non-exclusively as an integrated transaction facility to existing equity and options exchanges.
OTI is headquartered in Durango, Colorado, with additional offices in New York City, Los Angeles and Denver.
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