Richard:
Truthfully, there have been a slew of rumors about NITE and Ashton, some pointing to a possible buy-out of Ashton and some pointing to a liquidity commitment arrangement like the one NITE has apparently just forged with Optimark, but never in my dozen or so conversations with Fred has he ever stated or suggested that any deal had been cut with NITE for those purposes. That kind of liquidity commiter is something ATG would love to attract to the system, and NITE was a natural candidate, especially in view of the history between Pasternak and Rittereiser. I am sure that history gave rise to some of the rumors I have read on these message boards, and I'm sure some aggressive brokers (yeah, they have those in Northern Jersey) were all too willing to spread the rumors to pump up stock selling, and I have no doubt that there were discussions of one kind or another about these issues between the parties over the past two or three years. I don't know of any Ashton stockholder who would not want a commitment from a company like Knight to trade regularly on eVWAP, so at first blush, the Knight-Optimark alliance looks like it might be a lost opportunity. Indeed, my brief microsecond of disappointment at the announcement (I indeed did have a brief moment of "aw shucks" in my capacity as an ASTN stockholder - as a NITE stockholder, I actually liked the announcement a lot) was mostly in the nature of daydreaming about how well ASTN would have done yesterday were it ATG and not Optimark that had been announced. But that type of feeling is not real. And I know that come the end of this year and early next, ATG will be flying without any help from NITE. But back to substance -- here's why I think the NITE/Optimark alliance isn't anything to get bent out of shape about as an Ashton stockholder:
1. Optimark's system is more attuned to the way NITE currently trades for its retail customers: Optimark runs its matching algorythm (and thus executes matches) every two-three minutes at limit order prices within the execution range permitted by the then existing market at that moment (e.g., the bid/asked spread at that moment) -- which is to say it executes at a dynamic market price. That is pretty much the same way regular trading now works, only with Optimark, it is largely institutional trading conducted in a "confidential environment" using trading questionnaires to reflect trading preferences and involving a matching algorythm. If NITE matches a buy or sell on Optimark, it does so at the price the stock is trading for at that moment, the same as it would if one of its traders was buying the same stock in the regular way - on the bid from a seller, and at the ask from a buyer. Optimark just allows NITE to tap into the institutional market in a way they are not quite able to do now (being the intermediary for thousands of retail sized orders every day). NITE can then sell what it has bought, or buy what it has sold, and make a profit, within a matter of minutes. This is good for NITE because competition for order flow has never been greater -- NITE pays for order flow now, from ECNs and others -- the more order flow they have, the less risky their trading positions are (the more natural executions they can pull off at the spread without having to go long or short on a stock). By contrast to Optimark, which is at its core a limit order type system, eVWAP involves an entirely derivative price that isn't even known until after the close. It takes a little more thought and imagination for traders like NITE to commit to buy or sell a stock at the open, at a price (VWAP) that it cannot pin down until the trading day is 2/3 over or more. Institutions have no problem with it - they do a lot of VWAP trading now, with enthusiasm, because VWAP is unassailably a fair price, and eVWAP offers them a much better method of getting it done. By contrast, brokers only want to buy unmatched inventory if they feel highly confident they can trade it at a profit, something they do not know for sure with an eVWAP execution 5 minutes (or even an hour or two) after they know they are matched and will have to execute by the end of the day. Of course, as the day goes by, the VWAP figure for each stock stabilizes and becomes increasingly more and more predictable, and my guess is that brokers will actually come to see eVWAP as a trading tool, and will get comfortable with the idea of committing to buy or sell 25,000 shares of a stock like AOL at the VWAP, without knowing what the price will be at the point of the match, and then trade off of their match later in the day when it knows more or less how the VWAP for AOL will turn out. Summary -- for a major market maker like NITE, the nature of Optimark's system is simply a lot closer to what they are used to dealing with from a trading perspective, so it was a more natural fit. In that sense, I am not surprised and can see why one really has nothing to do with the other.
2. ATG Management does not appear to be willing to give the company away to any "liquidity commiter" at a cheap price in order to secure liquidity commitments. They seem pretty confident that natural and direct liquidity (from institutional customers, from the SDS/Belzburg type of order conduit systems, and from offshore customers) will far exceed that achieved to date by Optimark. It looks to me like Optimark had little or no choice but to pay NITE in a big way for NITE's commitment to provide liquidity to their system, because they were sucking wind, but it also appears (to NITE's credit) that they (NITE) recognized that increased liquidity (increased inventory) in their own trading business is critical to their survival, and that systems like Optimark are an alternative channel to get that liquidity. So for all I know, the deal may be more balanced than it seems on the surface. I am very curious how much of the specifics of the deal will ultimately be disclosed, but if NITE has the capacity to become Optimark's biggest stockholder, there must be a lot of warrants issued to them. And we don't know how cheap or expensive those warrants are. If ATG gave away 20 or 25% of the company over a promise of liquidity, I think the shorts would be having a field day about all the dilution, etc. The truth is, there is a lot we don't know about the NITE-Optimark deal which would bear on my opinion on how wonderful it really is for Optimark (how much Optimark will charge NITE for trading, the terms of the equity, the time periods, etc.) And I say that as someone who is long 2,000 shares of NITE at an average of about $25 per share. If eVWAP liquidity is not happening in 6-12 months, ATG may have no choice but to pursue a similar strategy with a similarly prominent B/D or MM, and give up a chunk of the company to make it happen, but for now, with no cash pressure and a lot of market interest in the system, I don't think they feel as if they have pursue that path at this point.
3. A few more things to note: I read somewhere comments by Pasternak to the effect that NITE has not quite figured out how much Optimark usage NITE is prepared to commit to at this point, and that it would be months before they really know for sure. He prognosticated that it might be as much as 20% of NITE's total volume, which would be very high, but that assumes a level of order placement in Optimark that has yet to be established, and it also assumes that NITE will receive sufficient liquidity in the Optimark system to make that system work for NITE - that is, to generate the order flow necessary for NITE to trade quickly, and thus into less riskier positions (the longer the trade takes, the greater the risk NITE is taking). It is also unclear what, if any, regulatory implications there are to this alliance - my guess is that there are regulatory issues about price disclosure and the like that will make all this a little less idyllic than it may seem at first blush.
4. There is a very positive dimension for eVWAP in all of this - the fact that a major retail market maker is choosing to seek order flow/liquidity for itself outside of normal channels bodes very well for ATG and other alternative trading systems that cater to institutions, in a general sense. eVWAP has built into it (both technically and in the regulatory approval) the capacity to attract brokers, market makers or specialists who are willing to commit to match shares of any stock on the buy or sell side. The name of the game in the B/D world these days is order flow -- eVWAP is a source of inventory that B/D's need to be profitable, but the B/D's will need to get used to the idea of the derivative price and work with it a little before they can get totally comfortable. The implementation of 7 intraday variations of eVWAP should make it easier to do this also, because such variation will give rise to a more predictable execution price for the B/D, and maore alternatives for trading off of it, etc.
Anyway, I'm not all that surprised and think the deal has almost no effect on ATG and eVWAP at all, with some incidental side benefits. To be really clear on this, I would imagine ATG would still love to have a NITE-like partner committing to provide liquidity to eVWAP, but I think we will have a better sense of all that in the first or second quarter of next year, when eVWAP has been fully operational for several months (remember, Optimark has been operational for 1-2 years, if my memory serves me correctly). Sorry for the long response, most of which is derived from a private message I sent to some folks yesterday -- hope it helps.
MST |
