Ashton Finds Anonymity Clearers
courtesy of Securities Industry News, Volume XII, Number 3, Monday, January 17, 2000
By Mark Hendrickson
With the recent signing of eight firms as anonymity clearing brokers, the Ashton Technology Group is looking to reenergize sluggish volumes on eVWAP™, its volume weighted average price trading system, launched last August on the Philadelphia Stock Exchange.
The firms, which Ashton declined to identify, are said by sources to include Merrill Lynch's Broadcort Capital Corp. and PaineWebber's Correspondent Services Corp. Broadcort and CSC officials could not be reached for comment.
The eight firms have agreed to anonymously execute, clear and settle institutional trades either directly or through Ashton's Croix Securities broker/dealer subsidiary. Reaching agreement with the firms proved to be more difficult than expected because of the anonymity clearing feature, said Fredric Rittereiser, Ashton CEO. In part, this was the spillover effect of risk concerns flagged by the Securities Industry Association's clearing committee last summer in relation to a similar anonymous clearing feature in the Optimark trading system.
"This phase of the eVWAP rollout, involving the integration of third-party clearing firms and the electronic integration of customers through their clearing agents, was a prerequisite for an effective electronic straight-through-processing system," said Rittereiser.
The Securities and Exchange Commission last spring approved the PHLX application to operate Ashton's eVWAP system on its equity trading floor as a one-year pilot in up to 300 stocks. But the phased-in launch last August has gone far less smoothly than planned, with trading volumes among 17 users in 20 stocks averaging only about 40,000 shares a day.
Rittereiser said questions about risks in anonymous clearing, as well as Y2K concerns, "probably put us back two to three months." Ashton made presentations to clearing firms last summer, he said, and "a number of them" indicated they would sign on. But that initial interest later faded.
"What happened was that in the world of anonymous trading, Optimark had a problem and it created a problem for us because we are involved in anonymous trading as well," Rittereiser said. "Clearing firms just refused to listen to anybody who had anonymous trading and clearing arrangements."
After the SIA letter to the SEC outlining what it viewed as "unacceptable risks" in Optimark's proposed anonymous clearing arrangements, "we had to go out and resell the fact that we not only have surveillance in our system, but have credit-authorization capability in our system," said Rittereiser.
Over the last two months Ashton met with 11 clearing firms, Rittereiser said. "One of them said no, that they opposed anonymous trading and clearing on principle. Two others couldn't react to us then because of Y2K. But the other eight, who were also party to the SIA letter and argument--once they took a look at our system and the credit authorization capacity that we had built into the system that protected them--were persuaded to sign on," he said.
In one of its two letters to the SEC last summer, the SIA clearing committee said the proposed Optimark clearing arrangements on Nasdaq "present unique risks to clearing firms and introduce significant risk into the clearance and settlement system." The committee added, "The inability to assess a correspondent's exposure to particular counterparties or to monitor for concentrated positions on an intraday basis presents unacceptable risks for clearing firms," and it raised the possibility "for serious systemic risk."
The SEC, despite these concerns, went ahead and approved Optimark to operate as a facility of Nasdaq. Optimark, Nasdaq, and SIA officials have been meeting since to address the clearing firms' continuing concerns about risk and, an SIA official said last week, "are on the verge of a solution." While the discussions were continuing, it "would not be appropriate to comment" on them, Optimark officials said.
Under the operation of Ashton's eVWAP™ on PHLX, preopening matches are assigned the daily volume weighted average price determined from all trades occurring during the same day as reported to the Consolidated Tape Association. Following a morning order-entry period, eVWAP™ executions will occur at about 9:20 a.m., with the volume weighted average price calculated and assigned at about 4:20 p.m.
Now with the clearing firm agreements secured, there are about 30 firms that Ashton had previously signed up and authorized to trade in the system that "we'll now connect electronically" over the next two to three weeks, Rittereiser said. The plan now is to expand the trading list to 50 stocks by the end of this month and add another 25 to 50 "every couple weeks," he said. |
